Hungary likely to have to change central bank law for IMF backstop, says City


Hungary is likely to have to make amendments to the recently passed central bank law if it wants a financial backstop from the IMF, London-based financial analysts said on Tuesday.

In its daily currency briefing released to investors in London, Commerzbank said that "the passing of the controversial central bank legislation has led to icy relations between the Hungarian government and the EU/IMF".

While Budapest is claiming that the majority of the changes to the bill demanded by the EU have been met, "the central points of criticism remain unanswered".

The European Commission is now going to have a close look at the new legislation. However, the EU, IMF and ECB comments already suggest that the agreed measures "do not comply with the principle of central bank sovereignty". The Hungarian government will therefore probably have to correct the law "if it does not want to forfeit any chance of gaining IMF support", Commerzbank’s economists said.

In a separate report published on Tuesday, 4cast, a major London-based financial consultancy said that the Hungarian parliament passed the controversial new Central Bank Act "leaving the main contended sections ... unchanged".

The market reactions to these changes have been obvious, the long end of the bond curve slipped to above 10% and EUR/HUF has moved back to just shy of all-time highs.

Also, "wealthy Hungarians have ... started opening offshore accounts to take money abroad. The scale of this capital flight remains to be seen - it is probably still small but it has definitely started and that’s how avalanches start as well".

"If you were a Hungary bull, you had expected that Hungary would go back to the IMF and get a loan, if you were a Hungary bear, you had expected Hungary to spiral lower without an IMF backstop. Going back to the IMF just to break the links soon after the talks were initiated does not seem to have been on anyone’s agenda ... market participants remain deeply puzzled", 4cast said.

Meanwhile, default insurance costs on Hungary’s sovereign debt surged to near-record highs on Tuesday, mainly driven up by uncertainties over the IMF/EU talks.

According to CMA DataVision, a major CDS market data monitor in London, Hungary’s five-year credit default swaps traded around 645bps after markets in London opened for the first time this year following the bank holiday on Monday, up from the 639.4bps close where Hungary’s CDS spreads finished last year.

A CDS contract valued at 645bps means that the cost to insure every €10 million worth of Hungarian bond exposure against default is currently €645,000 a year for the benchmark five-year bond maturity, over €10,000 more expensive than late last year.

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