Hungary bank policy rekindles uncertainty

Gyorgy Matolcsy, president of Hungary’s central bank (centre), speaks as Andrea Bartfai-Mager, member of the Hungarian central bank’s monetary council (left) and Adam Balog, vice-president of Hungary’s central bank, listen during a news conference in Budapest, Hungary (file). Hungary’s central bank yesterday announced plans to limit foreign investors’ access to its main liquidity tool, fuelling market worries about the bank’s policies.

Reuters/Budapest

Hungary’s central bank plans to limit foreign investors’ access to its main liquidity tool in a move announced yesterday, a clear sign that sweeping policy changes by its new governor are far from over.

The volatile forint fell and Hungary’s risk costs rose after comments by Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, that he wanted the bank to stop what he called the “wrong practice” of allowing foreign investors to take part in tenders for the bank’s two-week bills.

Matolcsy’s comments again fuelled market worries over the bank’s policies, after new measures launched earlier this month to kick-start lending to support the government’s pro-growth policies ahead of elections next year.

Orban’s Fidesz party immediately welcomed the plans to restrict access to the 2-week bills on which the bank pays 5% interest, saying this would curb the bank’s 2013 losses, which need to be covered from the state budget next year.

Analysts said Matolcsy probably had more measures up his sleeve and restrictions on two-week bills could weaken the forint, as it could lead to a drop in short-term market rates, equalling an effective interest rate cut. It was not immediately clear if the plans would be in line with European Union rules.

The forint eased to 297.50 forint per euro by 0946 GMT from around 294.60 before. Market participants and fund managers immediately expressed alarm on Twitter, with one calling it “another reason to pull out” of Hungary.

But the government’s bond auctions attracted solid demand, with yields falling.

Matolcsy told national news agency MTI that he agreed with the idea raised by the head of the country’s bank association that the 2-week facility should be transformed into 2-week deposits again. This would mean in practice that only domestic credit institutions could place funds with the central bank. “Those who benefit from the high yields and complete security of the Hungarian central bank’s two-week bill programme should agree to lend in Hungary and participate in preserving jobs in the Hungarian economy,” Matolcsy was cited as saying.

Matolcsy said he would propose to the Monetary Council that it should change the “wrong practice” which allowed foreign investors to take part in the 2-week bill tenders.

“With today’s interview he is risking the (recent) improvement in the country’s assessment,” said Janos Samu, an analyst at Concorde. “The concerns that weakened the forint to 307 earlier can gain new strength now.”

The bank has said it wanted to see a decrease in the stock of 2-week bills, its main tool to drain liquidity from interbank markets, on which it pays 5% now, the same as its key base rate. This is costly for the bank.

The total amount of funds placed in the bills is a staggering 4.56tn forints ($20.22bn) now and the bank has said this should go down to around 3.6tn. Only a small chunk of this is held by foreign investors.

The bank is also in talks with commercial banks about its plans to inject $2.1bn worth of cheap loans into small and medium-sized businesses and this bargaining has just started.

Matolcsy said it was “carved in stone” that the bank wanted to cut the country’s exposure to short-term foreign financing, and it was determined to reach its goal, referring to the planned reduction in the stock of two-week bills.

His powers over the bank sector could be boosted further if the government decides to merge the financial market regulator PSZAF into the central bank.

Matolcsy said the central bank supported this plan, and Fidesz party lawmaker Antal Rogan said yesterday that “this was on the agenda”.

Erste Bank analyst Zoltan Arokszallasi said the amounts of two-week bills held by foreigners have been volatile from month to month, often changing rapidly between 600bn forints and less than 100bn forints.

 “It’s not the amount that is important here but the option no longer being there for everyone to use the facility.”