Hungary Faces Debt Risks on Shorter Bond Bets
Hungary may be vulnerable to a bond market slump as shorter-term bets by foreign investors cut the maturity of holdings, according to Gyorgy Jaksity, the chairman of Concorde Securities, Hungary’s biggest non-bank broker.
The average maturity of non-resident holdings has fallen to four years from 4.7 years at the end of last year, according to data on the website of the state Debt Management Agency. The amount of Hungarian government Treasury bonds and bills held by foreigners fell to 3.92 trillion forint ($18.4 billion) yesterday from 4.02 trillion on Sept. 16, which was the highest level since Bloomberg started tracking the data in 2002.
Hungary’s debt maturities are shrinking as investors’ appetite for long-term risk falls on concern the euro area’s debt crisis will escalate. Hungary, as the most indebted eastern European Union country, may be one of the economies that would be most affected by a potential Greek default, Zsigmond Jarai, the head of the country’s Fiscal Council and a former central bank president, told TV2 on Oct. 11. Hungary is rated the lowest investment grade at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.
“It seems that short-term players entered the market,” Jaksity said in an interview in his Budapest office on Oct. 11. His company’s stock turnover on the Budapest bourse last month was second only to that of Erste Group Bank AG. “When risk appetite deteriorates or risk grows, that can turn around very quickly,” he said. “The good news is that that has not happened to any large extent yet.”
Yields Soar
Hungary cut its offer of 12-month Treasury bills at a second consecutive auction today as financing costs jumped to the highest in two years. The state sold 30 billion forint ($141 million) of bills today, 10 billion forint less than planned, at an average yield of 6.22 percent, the highest for that maturity since Oct. 29, 2009.
Hungarian bonds lost as much as 1.6 percent in forint terms in the second half of the year, according to data compiled by Bloomberg as of yesterday. That compares with a 25 percent slump in the benchmark BUX stock index since the end of June, led by a 44 percent plunge in OTP Bank Nyrt., the country’s biggest bank.
The forint lost 8.4 percent against the euro in the period through Oct. 12, making it the second-worst performer among more than 20 emerging-market currencies tracked by Bloomberg. The forint depreciated 0.6 percent to 291.8 by 1:21 p.m. in Budapest. The BUX rose 0.8 percent for a fourth day of gains.
Hungary is luring sovereign wealth funds from China, Russia, Norway, Saudi Arabia and Kazakhstan to become long-term investors in the Hungarian forint debt market, in a bid to balance risks posed by shorter-term investors, Gyula Pleschinger, the Debt Management Agency’s chief executive officer, said Sept. 30.
Vanishing Demand
Demand for Hungarian debt disappeared in 2008 after the collapse of Lehman Brothers Holdings Inc. led investors to sell riskier assets, forcing Hungary to become the first European Union country to obtain a bailout from the International Monetary Fund.
“The problem will materialize as it did in 2008, when we saw that even Treasury bills with maturities within a year didn’t always find a buyer,” Jaksity said. “If the international market approaches a state of near-collapse, then Hungary will find it very difficult to refinance itself on a market basis.”
Hungary has managed to wean itself off IMF financing by paying investors higher yields than peers. The Hungarian 10-year bond yield was 7.66 percent yesterday, bringing the gap versus Poland to 196 basis points and the spread against German bunds to 549 basis points. The Hungarian yield was 250 basis points above similar Polish notes on Oct. 4, the highest spread in two years, according to generic price data compiled by Bloomberg.
Reduced Liquidity
One factor that may slow the outflow of funds from Hungary, while putting upward pressure on yields, is the government’s effective nationalization of the $14 billion of privately managed pension assets this year, which reduced liquidity on the local debt market, Jaksity said.
“With the exit of local private pension funds from the market, the biggest potential buyer is gone,” Jaksity said. “It’s quite difficult to liquidate a larger position.”