Hungary was the surprise issuer in international markets this week. Contrary to previous plans not to issue hard currency public debt in 2021, Hungary suddenly rushed into international markets to place a multi-part agreement in dollars and euros.
A cumulative amount of 4.25 billion dollars (3.6 billion euros) was placed via a double tranche in dollars (maturities 10 years and 30 years), followed by 1 billion euros from a sovereign eurobond to seven years denominated in euros the next day (September 15). According to the Hungarian Debt Management Agency (ÃKK), the change in financing strategy was triggered mainly by a possible delay in the disbursement of the âpre-financing paymentâ under the Recovery and Resilience Fund (FRR) of the EU.
The disbursement of the pre-financing payments to other EU members have already started over the summer. This aims to launch the implementation of the investment and reform measures described in the respective recovery and resilience plans (RRP). Yet while Hungary’s RRP is still subject to approval, we believe Hungary’s rush for hedge funds was not triggered solely by a possible delay in this prepayment.
In fact, the amounts we are talking about are relatively small. In the case of Hungary, the pre-financing amounts to 13% of the total requested, 7.2 billion euros in grants for projects under the FRR, which would be equivalent to 0.94 billion euros in case of full attribution. Needless to say, any new government debt is also not a good alternative to grants from the EU’s Recovery and Resilience Fund (FRR). These do not add to the public debt bill in accounting terms.
So why did the Hungarian authorities rush into this big problem?
We believe that the reasons are more or less twofold, political and commercial. First, we assume that Hungarian policymakers wanted to send a political signal not only to Brussels but also to its electorate. This is nothing new, as ÃKK has already shown its muscles once by its easy access to international debt in a similar situation. Last year, it also lifted its Eurobond issuance plans amid an ongoing feud with the EU and a threat of delayed fund disbursements.
During the 10 years of Fidesz rule, the occasional opposition in Brussels has become an effective tool to impress / mobilize large swathes of the Fidesz electorate in the context of Hungary’s “(economic) struggle for freedom” , that is to say, the demonstration of its right to self-determination. . Fidesz can now easily sweat the conflict with the EU until the elections, which could give them additional voices.
As also mentioned by the KK, the fresh funds could also be used for âcertain public expensesâ, which could be interpreted as a stamp for additional campaign goodies.
As a result, the Hungarian administration appears to be bracing itself for a protracted conflict with the EU, at least until the general elections in spring 2022. The bond issues somewhat strengthen the Hungarian government’s negotiating position in the context of disbursements RRF funds.
Skirmishes with the EU as well as pre-election spending are absolutely necessary as we are heading towards perhaps the most competitive elections in Hungary in the last decade. According to current polls, the opposition has a good chance of winning the election.
Hungarian victory in the short term
Nevertheless, Hungary’s recent silver bullet in international debt markets is by no means irrational from a market perspective, for the following reasons:
(1) Eurobond funding costs are currently close to their all-time low, particularly in well-established EEC markets, both in the dollar and euro segments. Given the growing prospects for some normalization of the monetary policy of the main central banks, it makes perfect sense to lock in the current favorable financing conditions in terms of pre-financing. Regarding the latter, Hungary enjoys the comfortable position of not facing the repayment of Eurobonds next year.
(2) As this year’s financing progress in Hungary is on track, its local debt market is getting more expensive in light of an ongoing rate hike cycle.
(3) As many countries, including Hungary, have extraordinarily high ‘crisis budget deficits’ for the second year in a row, the local absorption capacity of its local debt market could reach its limits, especially when the stability of the local currency could suffer in the event of over-straining local funding sources.
(4) Finally, the Hungarian dollar and Euro-Eurobond markets have shown relatively higher resilience / less volatility over the past two years compared to the benchmark markets, not to mention the Hungarian euro-bond market. debt in local currency.
Finally, in terms of the composition of recent deals, the offer was, in our opinion, skillfully constructed. Regardless of the relative cost of funding dollar Eurobonds versus Euro Eurobonds, to start with a double USD tranche, ÃKK went to an investor base that supposedly isn’t as sensitive to internal political problems in the EU as the base of investors based on the euro.
Additionally, the emerging market dollar investor base is much more diverse and familiar with high yield emerging sovereigns than the international euro market. Therefore, Hungary is perhaps seen more here as a high quality credit and portfolio stabilizer. In addition, the USD investor base is larger than the EUR camp and the major international leaders in USD transactions have huge client bases at their disposal.
It is also a litmus test for filtering general investor sentiment while signaling a potential EUR denominated second party the day after incorporating a “first come, first served” into the USD offerings, given the self-imposed limit of 4.5 billion euros set in advance by ÃKK. .
Finally, with Hungary not being in the USD Eurobond issuance pipeline since 2014, the high allocations to USD investors certainly cultivate this for a long-standing (overlooked) clientele. By cultivating this customer base, Hungary increases its refinancing flexibility.
In this context, it should be emphasized that since 2019 the Hungarian debt management has been led by a seasoned banker, who knows all the options to optimize the footprint of the Hungarian market in terms of maturity, resilience of market segments and of monetary structures.
However, the recent behavior of investors in the international capital market also leaves a somewhat bitter taste as it shows that the EU financial whip is not working as expected. So a victory for Hungary in the short term, although we still believe that Hungary remains interested in receiving EU funds in the medium and long term and could act a little more pragmatically after the 2022 elections.
Rate curve for the euro in yellow, the dollar in blue and the forint in gray.
Source: Refinitiv, Bloomberg, RBI / Raiffeisen Research.
Gunter Deuber is Head of Research at Raiffeisen Bank International in Vienna. Stephan Imre is an economist specializing in CEE bond strategy at RBI.