Hungary’s Massive FX Debt Sale Signals EU Row May Drag On

Hungary raised the equivalent of EUR.4. billion in foreign-currency bonds this week in one of the largest FX debt issuance in the country’s history. The move suggests the government expects the dispute with the European Union over funding to drag on.

Hungary sold USD 2.25 billion in 10-year dollar bonds, USD 2 billion in 30-year dollar bonds and EUR 1 billion in seven-year Eurobonds this week, according to data published by the Refinitiv new service. The move comes as the government seeks to shore up its finances amid a dispute with the European Union over funding issues. Hungary last tapped the euro bond market in November, and hasn’t sold dollar bonds since 2014.

Revamped financing plan
Hungary’s debt management agency AKK on Monday overhauled its financing plan for the 2021 foreign-currency debt sale, raising the cap to EUR 4.5 billion euros from HUF 644 billion forint. The revamp was necessary due to Hungary’s ongoing dispute with the EU over democratic values, which is delaying the country’s access to the bloc’s pandemic aid fund. The EU has raised concerns about Hungary’s fight against corruption and has delayed the assessment of Hungary’s pandemic plan until the end of September. Analysts believe that the AKK’s overhaul of the 2021 financing plan suggests there won’t be an agreement between Budapest and Brussels ahead of September 30. Should Hungary get a green light from the EU, the country would gain access to HUF 326 billion in pandemic relief funds.
Along with the increased FX debt issuance, the financing plan also contains a modification concerning retail and wholesale debt sales. Under the new plan, retail bond issuance will decrease by HUF 15 billion, while regular government bond sales will increase by HUF 230 billion compared to the previous plan. All in all, the updated cash-flow based deficit target is set at roughly HUF 5.140 trillion instead of the previous HUF 3.990 trillion.
The AKK said that the 10-year bonds were sold with a 2.125% coupon while the 30-year bonds carry a 3.125% coupon; the coupons are 100 basis points and 150 basis points higher than the corresponding U.S. Treasuries, respectively. Finance Minister Mihály Varga said that the pricing of the Eurobond was being finalized but could end up between 0.3% and 0.35%.
Now is an optimal time to sell foreign-currency bonds as spreads on dollar and euro debt are close to the lowest levels in more than a decade given the very low global interest rate environment.

Wider budget deficit
The government has come a long way from its original 2.9%/GDP deficit target for 2021 set in the middle of last year. First, the Cabinet modified the accrual-based target to 7.5% of GDP in December 2020, and then the AKK raised the cash-flow-based deficit target to HUF 3.990 trillion in May 2021. This time, the AKK is again changing the plan and moving the cash flow based deficit target even higher. This week’s debt issuance will partially pre-finance some government expenditures in late 2021 and in 2022, which suggests that the government will ramp up spending in the last months of this year ahead of next year’s general elections. The government will use EUR 2.86 billion of the newly raised funds to pre-finance state debt maturing in 2022. This could be linked to the fact that the central bank announced recently it would decrease the amount of government bond purchases it planned to implement.
Analysts at ING Bank in Budapest noted that Hungary’s nominal GDP growth will be almost 1.5-times higher than seen earlier, giving plenty of room in the debt-to-GDP target. The AKK adjusted the financing plan in light of the much better nominal growth, using part of the available room for maneuver without jeopardizing the 79.9% debt-to-GDP target already in place, ING economists said.
In addition, the general government deficit for the first 8 months of 2021 was only 47% of the full-year deficit target, so there remains plenty of room for year-end government spending.