News
HU: Negative – EC recommends suspension of cohesion funds as of 2013 (p1)
Today’s Events
BG: Dec external debt / ES: Jan PPI / HU: HUF 20bn 2015/C, HUF 12bn 2017/A, HUF 10bn 2028/A GB auctions / PL: Jan retail sales, Jan unemployment / RO: RON 300mn 2027 GB auction / SRB: Jan CPI / TK: Feb capacity utilisation rate / UA: UAH 6M and 12M T-bill, 2Y and 3Y GB, USD-linked 3Y GB auctions
EEMEA Markets
CEEMEA bond auctions today: 1) Hungary will sell a total HUF42bn HGBs today (15/C, 17/A and 28/A papers). Ahead of the auctions and following the announcement by the EC that it proposes to freeze EUR500mn cohesion fund subsidy yields jumped about 30bp yesterday. The curve maintained steepening bias. Given the likely support from the LTRO we continue prefer the short end (in today’s case the 15/C paper) compared to mid to long end (see our strategy note from last Friday). 2) Romania will sell its first ever 15y local currency ROMGB papers. The indicative offer size is RON300mn. The currently longest paper (the June 2021) is trading around 7.10% and we would expect at least 20-30bp yield pick up with the new paper. We stay bullish Romania local currency assets albeit at the short end and continue recommend buying 1y t-bills currency undhedged. Following the sharp rally in other CEE currencies we expect increasing non-resident investor interest in the lagging RON.
EC propose to suspend EUR495mn cohesions funds for Hungary as of 2013: Yesterday, the European Commission proposed to suspend EUR 495mn of the cohesion fund (about 0.5% of GDP) as of 2013, which would represent about 29% of the fund allotment for that year. EU Commissioner Olli Rehn confirmed that the EC regards it a preventive measure and highlighted that Hungary has until the beginning of January next year to bring its deficit back on track. The announcement about the cohesion funds should not be a major surprise given Hungary’s experience in the excessive deficit procedure and the significant fiscal loosening which occurred last year.
The fact that the government has another 10 months to correct its fiscal policy suggests that, at this stage, it is more of a tool to increase pressure on the government. This external pressure seems pretty much needed as the Hungarian government seems to be trying to play the Turkish way in terms of dealing with the IMF. But, we think the government is probably playing this strategy very naively given its significant financing needs (EUR 5bn for this year). Without an IMF/EU deal it seems highly unlikely to us that the government can issue this amount of Eurobonds.
The start of the official talks is already way behind schedule (the government had hoped to start in January) and at the moment we do not have any timeline in terms of when the EU will respond to the latest Hungarian letter on the three infringement procedures. Given that the government did not accept all the criticisms, we see room for more delays on this front.
Market strategy: So far the market has not responded to the potentially significant additional delay in the IMF/EU talks but we see room for market weakness from here and this is exactly the reason why we scaled back our bullish positions (see Hungary: the end of the honeymoon period? in our Feb 9 Weekly Focus publications). In terms of which asset class is more vulnerable, we are mostly worried about local currency bonds, which appear fairly expensive against hard currency bonds. Given the dovish nature of the NBH and the 2Y LTRO, we also expect the IRS curve to bear steepen and continue to keep our 2Y5Y HUF IRS payer position and continue recommend shortening duration.
Click here to read the full report: EEMEA daily 230212
Gyula Toth
UniCredit Research