Hungary scrapped a treasury bill auction and its stock market fell on Monday, signaling the last week’s measures to shore up financial markets have failed to quell concerns about its banking system and debt.
Foreign investors have dumped Hungarian assets over the past two weeks as Hungary’s large external financing needs and the banking sector’s foreign currency exposure sparked fears on whether it can ride out the global credit crunch.
The central bank and government moved to cap speculation it could follow Iceland in running into trouble, announcing faster than planned budget deficit cuts in 2008 and next year. They also lined up potential financial help from the International Monetary Fund and the European Central Bank. But even as other markets in the European Union’s former communist bloc gained on Monday, Hungary’s currency, bonds and stocks all lost more ground. Its biggest lender, OTP Bank, slid 6.35% to Ft 2,950 by 1010 GMT.
The Government Debt Management Agency (AKK) said on Monday it had scrapped a bill auction after bids totaled just Ft 10.4 billion for an offer of Ft 30 billion worth of bills maturing in April 2009. The central bank launched auctions to buy government bonds last week as part of its efforts to revive a debt market which has frozen up, but traders said the market was still illiquid. “There are no buyers. If the central bank buys government bonds, this does not mean that foreigners will start buying (Hungarian papers),” a fixed income trader said.
A Polish 52-week treasury bill auction was also cut on Monday but about half of the planned amount was sold. Hungary’s problem is a high current account deficit and public debt that mean it relies more on external cash than its neighbors. On Friday Fitch Ratings was the second ratings agency to worsen its outlook on the country’s credit standing. “We think this (auction on Monday) means that short-term measures that were introduced last week have been running out of steam a bit,” said György Barcza, economist at K&H Bank. “You can highlight at least three problems: a risk premia shock, C/A financing gap with external debt sustainability and credibility could all be behind this to some extent.”
Analysts have said Hungarian authorities’ measures could ease but not resolve the main problem -- how Hungary can prevent foreigners closing off flows of euros, Swiss francs and dollars. Hungary relies on foreign investors buying its government papers to finance its large external debt and, with forint interest rates high, the vast majority of lending has been in foreign currencies in the past few years. When these loans are extended, locals banks borrow from their foreign parent bank or in international money markets, and they swap the proceeds into forints, but they have found it difficult to hedge their foreign currency exposures since liquidity dried up.
The central bank will hold a rate-setting meeting later on Monday where it is widely expected to keep interest rates on hold at 8.50%, but some analysts raised the possibility of an interest rate hike. In a Reuters poll last week 13 out of 15 analysts forecast the MNB would keep rates on hold in the fifth month in a row, while two analysts projected a 50 basis point rate hike. “In the current environment, the only realistic choice is between whether the central bank (MNB) will keep rates on hold or hike them,” Goldman Sachs said in a note. “We have a forecast of stable rates, but the risk of a rate hike is not negligible.” (Reuters)