Bonds go south on euro date concern

Interview

Hungarian bonds posted their first weekly drop since June after central bank President Zsigmond Járai said euro adoption may be delayed beyond 2013. Hungary won't set an official target date for joining the euro, and plans to meet the terms by 2010 at the latest, Prime Minister Ferenc Gyurcsány said on Friday, according to MTI news agency. Járai said Aug. 1 the government's deficit reduction plan is „not suitable,” delaying euro switchover by more than three years from an earlier goal. „Hungary and Poland are both effectively now operating without a euro target, it is clear that the whole concept of convergence continues to lose appeal,” said Martin Blum, head of emerging-market strategy at Bank Austria Creditanstalt AG in Vienna. „Traditional convergence fund bond holdings will be much more driven by” the economic picture. The yield on Hungary's 5.5% bond due February 2016 rose 22 basis points this week, to 7.50%. Its price fell 1.33, or Ft 133 per Ft 10,000 face amount, to 86.68. Bond yields move inversely to prices. In July, 10-year debt rose as lawmakers approved tax increases to cut the budget gap. Generic 10-year bond yields dropped 70 basis points to 7.24% in July, their biggest monthly decline since June 2005, according to data from the Debt Management Agency. Bond yields move inversely to prices. The government has abandoned its plan to adopt the euro in 2010 as it forecasts the shortfall at three times the limit stipulated as a condition for joining the EU's single currency.

Prime Minister Ferenc Gyurcsány June 10 proposed measures to lower the budget shortfall by Ft 2.35 trillion ($10.3 billion) through 2008. S&P on cut the country's credit rating to three levels above junk, five days later, citing budget concerns and estimated the gap would widen to 12.5% without the deficit cut measures. The program includes cuts to energy-price subsidies, increases to the value-added tax and other levies, and wage curbs for state workers. „Gyurcsány’s plan is not suitable,” Járai said this week in Budapest. „The economic path doesn't lead to euro adoption.” The government has raised its estimate for the budget gap this year twice in less than two months. The government now expects the shortfall will reach 8.6% of gross domestic product in 2006, compared with an earlier goal of 4.7% and three times the limit required for adopting the euro. (Bloomberg)

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