Local govt debt woes send Hungary CDS to 6-month highs

The cost of insuring Hungarian debt against default rose to levels unseen since late January on Wednesday after Hungarian local governments asked for a delay on principal payments on about HUF 600 billion ($3.18 billion) of Swiss franc loans, Reuters reports.

Hungary's five-year credit default swaps rose 17 basis points to 338 bps, according to data from Markit.

Hungary's local councils have outstanding debt of HUF 1,200 billion of which about HUF 600 billion was issued in the form of bonds in 2006-2008, but mainly in 2007, MOSZ chairman György Gémesi told Hungarianwire agency MTI.

The Hungarian Association of Local Governments (MOSZ) has asked Prime Minister Viktor Orbán in a letter to intervene with banks in the interest of achieving a delay. "Informal talks have confirmed that lending banks are open to such an agreement with local councils," the MOSZ said in the letter.

Most of the bonds had 20-year runs with three-year grace periods, thus principal payments will be due on many this year, he said. Many of the bonds were denominated in Swiss francs, and that currency's "brutal" exchange rate to the forint will require many local governments to seek assistance to avoid defaulting, he explained.

About 85% of municipal bonds were denominated in foreign currency at the end of March, latest National Bank of Hungary data show. About 89% of the bonds were subscribed by domestic banks. The rest were held by foreign entities.

"Credit markets have not particularly appreciated the...move which would be tantamount to a restructuring," Reuters citied Tim Ash, head of CEEMEA research at RBS, as saying in a client note.

"The move is perhaps weighing on sentiment as this somehow implies a lack of willingness to pay on the part of some public sector entities."