"Hungary's regulators have announced steps in response to the loss of confidence in Hungarian assets in an attempt to boost credibility and improve liquidity conditions.Citbank has said on Monday that bond market measures, fiscal restrictions and the International Monetary Fund's (IMF) backing to Hungary may help to stabilise market confidence in the short term. Citibank continues to believe that the weakest link in the economy is the banking sector, and “the forint may remain under constant depreciation pressures" if interbank market conditions remain tight and constrain domestic banks' access to FX funding.
Asset swap spreads have neared 300 bps as liquidity has dried up in domestic bond markets, and the 5-year sovereign CDS spread jumped by 100 bps on Friday.
The forint peaked above 270 against the euro on Friday morning, a depreciation of more than 8% within 24 hours, as interbank FX swap markets froze and some market participants worried that the biggest domestic bank, OTP Bank, may be in trouble.
In addition to denying that the government would bail out OTP Bank, the key policy responses announced so far include the following:
- Monetary policy: The NBH has opened a new O/N EUR/HUF swap auction for domestic banks as of today, where it will act as a clearing house to eliminate counterparty risk. The NBH will only act as an intermediary within banks and will not take FX positions that would affect its FX reserves.
NBH Governor András Simor, has reiterated that the MPC will defend the forint as needed, and rates may go in any direction in the current environment. Separately, NBH Vice Governor Karvalits denied that the NBH intervened on the FX market on Friday, and stated that the NBH is not planning any bond purchases to ease bond market pressures.
Analyst view:
“The weakest link in the economy is the banking sector, and the forint may remain under constant depreciation pressures if interbank market conditions remain tight and constrain domestic banks' access to FX funding," said Eszter Gárgyán, analyst at Citibank in Budapest.
“This is likely to limit Hungarian banks' ability to expand FX credits, something we have already observed locally in the recent weeks."
“Although regulatory measures may help to ease liquidity conditions in the interbank swap markets, our view is that the NBH's FX reserves (EUR 17 billion) are too small to allow the NBH to step in as an FX liquidity provider for domestic banks alone."
“Hungarian banks have short-term FX liabilities of around EUR 14 billion and hedge the open FX exposure of their balance sheets on the FX swap markets. Therefore, we continue to focus on interbank swap market conditions, and expect the forint to continue to weaken if current market tensions do not ease."
The forint peaked above 270 against the euro on Friday morning, a depreciation of more than 8% within 24 hours, as interbank FX swap markets froze and some market participants worried that the biggest domestic bank, OTP Bank, may be in trouble.
In addition to denying that the government would bail out OTP Bank, the key policy responses announced so far include the following:
- Monetary policy: The NBH has opened a new O/N EUR/HUF swap auction for domestic banks as of today, where it will act as a clearing house to eliminate counterparty risk. The NBH will only act as an intermediary within banks and will not take FX positions that would affect its FX reserves.
NBH Governor András Simor, has reiterated that the MPC will defend the forint as needed, and rates may go in any direction in the current environment. Separately, NBH Vice Governor Karvalits denied that the NBH intervened on the FX market on Friday, and stated that the NBH is not planning any bond purchases to ease bond market pressures.
Analyst view:
“The weakest link in the economy is the banking sector, and the forint may remain under constant depreciation pressures if interbank market conditions remain tight and constrain domestic banks' access to FX funding," said Eszter Gárgyán, analyst at Citibank in Budapest.
“This is likely to limit Hungarian banks' ability to expand FX credits, something we have already observed locally in the recent weeks."
“Although regulatory measures may help to ease liquidity conditions in the interbank swap markets, our view is that the NBH's FX reserves (EUR 17 billion) are too small to allow the NBH to step in as an FX liquidity provider for domestic banks alone."
“Hungarian banks have short-term FX liabilities of around EUR 14 billion and hedge the open FX exposure of their balance sheets on the FX swap markets. Therefore, we continue to focus on interbank swap market conditions, and expect the forint to continue to weaken if current market tensions do not ease."
Source: Portfolio Online Financial Journal
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14.10.2008