Hungary’s international reserves fell behind the country’s rapidly growing short-term external liabilities by the middle of 2008, the National Bank of Hungary (MNB) conceded in a statement on Wednesday, but it placed part of the blame on the Government Debt Management Agency (AKK), which failed to act on the MNB’s urging to make foreign issues.
With the €20 billion credit arrangement of the IMF, EU and the World Bank, Hungary’s international reserves now more than meet short-term external debt criteria, the MNB said in a statement intended as a response to critical remarks on the central bank’s reserve management by AKK chief economist Zsuzsa Mosolygó in an article published on the website portfolio.hu.
Ms Mosolygó noted that the insufficient level of the reserves compared to short-term external debt was one important factor making Hungary vulnerable to attack when markets plunged and the forint weakened sharply in October. Other factors included years of expansive, debt-generating fiscal policy, and the sharp increase of foreign-currency denominated lending, Ms Mosolygó said, putting most of the blame on banks but also on the regulator and on the central bank.
In response to the criticism, the MNB said that, in earlier years, and even in 2007, Hungary’s foreign reserves met all criteria, including the Guidotti-Greenspan rule, which states reserves must be sufficient to cover a country’s short-term external liabilities.
Because of the global financial crisis, however, the term of Hungarian banks’ foreign liabilities started to shorten by the end of 2007. Short-term external debt has increased at a faster pace than international reserves since. The MNB said that several other countries in the region experienced similar problems and their short-term external debts rose to exceed reserves by the middle of 2008, as did Hungary’s.
The MNB said that the Guidotti-Greenspan rule attaches the same risk to each element of short-term external debt, while more than half of Hungarian banks’ short-term debt -- or about a third of the country’s short-term external debt -- is owed to their parent banks, limiting the risk they will not be renewed.
The MNB said it had limited power to directly affect the level of the reserves since 2004, when AKK took over as Hungary’s sovereign issuer. The MNB is now able to air its views on reserves only when commenting on AKK’s issue plans once a year, the statement said, adding that AKK’s main consideration is the financing of the fiscal deficit.
The MNB said it had urged AKK to make foreign issue on several occasions since the autumn of 2007. It added that, in general, it supports domestic budget financing. The statement said that the government debt manager, referring to widening spreads, had postponed issues, issuing only HUF 300 billion of foreign bonds last year, as against HUF 500 billion in the original 2007 issue plan. I
n 2008, instead of issuing at the beginning of the year, AKK delayed the foreign issues again, citing the changed external environment. It waited with part of the issues until the autumn, when spreads jumped to irrational levels, the MNB said.
The MNB said it had first sold less of some of the government’s net foreign proceeds on the interbank market, then, in Q1 2008, stopped selling them altogether as reserves became a problem. These sales, made in small quantities in a market-neutral manner, cut the reserves by an average €600-700 million a year between 2004 and 2007, when the level of reserves exceeded the adequate, at the time, level of €16 billion. Costs are among factors behind reserve management, the MNB noted.
The MNB said earlier it converted a total of €588 million of net government foreign exchange proceeds on the market in 2007, including €190 million in Q4 last year, and sold €38 million in Q1 2008, after which it stopped the sales.
Hungary issued five- and eight-year Swiss franc-denominated bonds worth CHF 150 million and CHF 200 million, priced at 50bp and 76bp over the CHF Libor, respectively, in April, and a ten-year 1.5 billion euro-denominated bond at a spread of 98bp over mid-swaps in June. The foreign bond issues, including the rise in their forint value due to the weakening of the forint, made up three-fourth of net issuance in the first ten months. (MTI-Eco)