Hungary talks up forint as bond auction fails
By Päivi Munter in London
Published: December 2 2003 13:19 | Last Updated: December 2 2003 13:19

Trading on the Hungarian domestic bond market ground to a halt on Tuesday
after the government's treasury bill auction failed and monetary
authorities were forced to pledge support for the vulnerable forint.

Despite this, speculation mounted that the central bank would either have
to raise interest rates – just days after last week's 300 basis point
increase to 12.5 per cent – or allow the forint to float freely.

The currency fell to a record low of Ft274.61 against the euro on Tuesday,
but recovered slightly to Ft273.25 following the statement from the central
bank and the finance ministry.

The statement said the fall in the forint was unfavourable to the Hungarian
economy and that the authorities would defend the currency.

Market makers in the domestic bond market stopped quoting prices as the
uncertainty about the monetary policy grew.

Yields on three-year government bonds have risen about 540bp since the
beginning of the year to about 12.85 per cent, as investors have pulled
funds out of the market amid fears over the country's budget and current
account deficits.

Foreign investors hold about 40 per cent of Hungary's forint-denominated
government bonds. Should they all opt to exit at the same time, the central
bank's foreign exchange reserves would quickly run out.

After years of rapid convergence with the eurozone, Hungary has this year
diverged from Europe's developed bond markets as widening deficits have
prompted worries about the government's plan to join the eurozone at the
earliest available date. Hungary is one of the 10 accession countries
joining the European Union in May and committed to adopting the euro once
its economic performance meets the Maastricht criteria.

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