MNB to terminate IRS tenders in July

MNB deputy-governor Márton Nagy said late in April that the MNB was “quietly phasing out” the tenders. 

The IRSs are an important element of the central bankʼs Self-Financing Program, launched two years ago to give banks an incentive to buy government securities, rather than keep their liquidity in central bank deposits. The last of the IRSs will mature in about four years. 

Demand for the central bankʼs IRSs, which it uses to share some of the interest rate risk taken by banks who buy long-term government securities, has been strong over the past two years, with stock now exceeding HUF 1.5 trillion. However, demand dropped off this spring as banks adapted to the restructuring of the MNBʼs policy tools during the run of the program. 

“With the phasing-out of the two-week deposit facility in April 2016, banksʼ adjustment has largely ended and with the reduction in the governmentʼs foreign currency debt, the value add of the instrument... has been declining. After thorough consideration of the costs and benefits related to the maintenance of the instrument, the MNB has decided that it will withdraw the instrument from its operations and will hold its last self-financing IRS tender on July 7, 2016,” the MNB said. 

The central bank said the Self-Financing Program had “reached a turning point”, achieving its objectives. In the past two years, banksʼ holdings of government securities have risen by about HUF 2.7 tln and lenders have become the main creditors, instead of foreign investors, on the forint government securities market, resulting in more stable debt financing, it added. 

The program supported the refinancing of FX state debt worth more than €8 bln in 2014-2016 as well as a decline in the ratio of FX debt to total state debt from 50% to under 30%, the MNB said. Yields, even long-term yields, fell to levels around those of Polish government securities, contributing to easing monetary conditions, it added. 

The program cut the MNBʼs balance sheet, generating savings of HUF 30 bln during its run, and reduced future interest expenditures by “tens of billions of forints per year” and lowered the central bankʼs interest rate risk. 

The structure of Hungaryʼs debt is “healthier” and maturing FX debt will be “far smaller” in the coming years as the FX ratio in state debt approaches a historical low at the end of 2016, making it unnecessary “to continue the dynamic reduction” in the ratio, the MNB said.