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Tuesday, November 21, 2006

Sustaining The Debt

Now I am not going to enter the political squabble which are going on all over the place, but I think former Prime Minister Péter Medgyessy draws attention to an important issue here: the rising cost of servicing the debt. Doubtless this was another factor in today's rate hold decision. Probably it is very unfair to blame the central bank for all these ills though, the current high rates are undoubtedly part of the general economic and financial crisis which Hungary is facing:

“The bank perfectly mistrusted the government,” wrote Medgyessy, premier from 2002 to 2004. “The unwarranted high level of interest rates grossly increased the government's expenses, chasing economic policy into a vicious cycle.” Medgyessy said the bank, which had cut its benchmark rate seven times in five months before he took office, for erasing half those cuts within three months of the vote. The former premier missed budget deficit targets every year in office and Hungary hasn't met its annual goals since. A telephone message left for spokesman Gábor Missura at the central bank seeking comment wasn't immediately returned. Public debt is set to rise to 72.3% of gross domestic product by 2008 from 62.3% last year, according to the government's projection. That's above the 60% limit for euro adoption. Medgyessy was forced out amid a coalition dispute and the lowest support for his Socialist Party in three years. He was replaced by Ferenc Gyurcsány, who led the coalition to a second consecutive term in the April election and stared measures to cut the budget shortfall, the European Union's widest. “It has been obviously proven by now that the switch of prime ministers was at the right time and was successful and fruitful for the coalition,” Medgyessy wrote. “The new government's reform momentum is unquestionable.” Gyurcsány raised taxes and cut subsidies to trim the shortfall and wants to overhaul the country's health care, education, pensions, local governments and public administration. That may be too much, according to Medgyessy. The government “is overreaching on reforms,” Medgyessy wrote. Overhauling that many sectors of the economy “isn't possible to carry out -- it results in frittering away energies and opens fronts against all social strata.” Medgyessy is now a traveling ambassador in Gyurcsány's government. He may be the premier's choice to replace central bank President Zsigmond Járai when his term expires next March, Web site Hirszerző said in April. (Bloomberg)

Meantime the comparatively high yields on Hungarian debt continue to drive the forint up:

Hungary's forint advanced to its highest in more than eight months as investors bought forint- denominated debt, the highest-yielding in the European Union.

The forint climbed for a second day as foreign holdings of Hungarian bonds surged to a record high of Ft 2.92 trillion ($14.5 billion) yesterday after the country's central bank kept its benchmark interest rate on hold at 8%. “The central bank's decision to leave rates unchanged triggered a rally for Hungarian bonds, which supported the forint,” said Martin Blum, head of emerging-market strategy at Bank Austria Creditanstalt AG.

The yield advantage offered by Hungarian debt securities is prompting foreign investors to buy forint-denominated bonds. The yield difference, or spread, investors demand to hold Hungarian 10-year debt rather than similar-maturity German bunds is 318 basis points, compared with 299 basis points six months ago.

Even as the yield on government bonds now starts to turn due to the high demand:

Hungary's Government Debt Management Agency (ÁKK) has received HUF 125.7 billion worth of bids on HUF 30 billion 3-month discount T-bills (D070228) at an auction on Tuesday. The 4.2x bid/cover ratio was not enough for the ÁKK to sell more of the instrument than originally planned.

The bills were sold at an average yield of 7.98%, down 17 basis points from Monday's benchmark fixing (of series D070314), but 6 bps up from the previous auction a week ago.

The ÁKK will offer HUF 45 bn and HUF 40 bn worth of 5-yr and 10-yr bonds, respectively at auctions on Thursday.

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