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ÁKK's Borbély comments Moody's downgrade, CDS and yields

The downgrading of Hungary's credit rating by Moody's on Monday had a one-day effect on yields, László András Borbély, the deputy CEO of Hungary's state debt manager ÁKK told Econews. Borbély sees no evident link between credit ratings and CDS prices.

Forint yields rose 5 bp on Moody's step but retreated to last Friday's levels by Tuesday. There was no auction to be affected on Monday, and Tuesday's three-month discount T-bill auction saw strong demand and dropping yields.

Moody's measure was already expected and only its size caused some surprise, Borbély said. He attributed the 80-100 bp rise of Hungarian government bond yields of the past month mainly to global effects, namely to worries related to Eurozone government debt.

It is hard to establish any direct link between credit ratings and CDS prices, the ÁKK deputy CEO said. Hungary's five-year CDS, at 366 basis points at present, is far below the 533 bps Irish or the 428 bps Portugese figure, he said, noting that both countries' ratings are better than Hungary's.

Budget expenditure is affected only by steady increases of yields, he said, working through the interest of short-term T-bills and floating-rate bonds and the bigger discount of primary bond sales.

A 1% point rise in forint yields, if prevailing from January to December, could raise the annual budget interest expenditure by HUF 85 billion as the most, Borbély estimated based on the current issue structure. The figure compares to net interest expenditure of about HUF 1,000 billion.

Higher CDS prices could affect foreign currency debt related expenses when new foreign issues are priced, the deputy CEO said. The expected yield is calculated as the prevailing CDS plus a spread of 50-100 bps.

Hungary's foreign currency debt is denominated in euros and about a third of it is floating-rate debt (some fixed-rate issues are swapped to ensure the structure), but the low short-term euro interest rates minimize the effect of interest rate changes.

While higher CDSs could have some affect on forint yields, the secondary market effect on Hungary's foreign bond is minimal, Borbély said. The secondary market in Hungary's foreign bonds is very limited as the relatively small series (rarely more than €1 billion) are mainly taken up by ultimate investors who keep them to maturity.

Borbély declined to comment on next year's government interest expenditure, saying that ÁKK had considered all factors known at the time of preparing the expenditure and revenue targets in the 2011 budget bill. Neither the market developments that has taken place since the budget was prepared nor the currently foreseeable developments resulting from the changes of the pension fund system make a revision of the targets necessary, he said.

The 2011 budget bill before parliament targets total debt service expenditure of HUF 1,064 billion, including HUF 299 billion spending on the interest of foreign currency debt and HUF 753 billion forint debt interest expenditure. Revenue from principal and interest owed to Hungary totals HUF 59 billion, including HUF 50 billion in forint revenue.

The explanation attached to the bill shows that the budget calculated with a significant decline of forint securities yields and an increasing debt stock, not taking into account the eventual debt reduction from the assets transfer of those returning to the state pension system. (MTI – Econews)