So many things are so unclear at the moment. What attitude does the IMF actually have towards the current Latvian bailout programme? Is there really a “spat” taking place between the EU Commission and “the Fund”, and just what is going on in Hungary? In fact, I have a longer post going up later on today which will ask just this very question, but in the meantime, we could ask why the Hungarian Finance Ministry was so happy to pay 6.79 percent to sell one billion euros worth of bonds last Friday, considerably more, for example, than the the 5.9 percent on existing euro-bonds due May 2014, and more than they would pay the IMF for the forthcoming tranches of their loan.
Hungary sold its first debt to foreign investors since last yearâ€™s International Monetary Fund bailout, taking advantage of the worldâ€™s strongest bond market rally to borrow 1 billion euros ($1.4 billion). Investors ordered 2.9 billion euros of the securities, nearly six times the 500 million euros the government initially planned to raise, Finance Minister Peter Oszko said in an interview today. The government lured buyers by offering a yield of 6.79 percent on the five-year debt, more than the 5.9 percent on existing euro-bonds due May 2014.
According to some this sale was a huge success:
â€œThe transaction has a very positive message,â€ said Gabor Orban, head of fixed income at Aegon Hungary Fund Management in Budapest, who manages about 3 billion euros of assets. â€œHungary is able to return to market financing, both in forint and euros.â€
But the explanation may be far more complex. According to Portfolio Hungary this morning, it is now possible that the next tranche of the IMF credit facility due in September will be drawn by the central bank and not the Hungarian government (citing AndrÃ¡s LÃ¡szlÃ³ BorbÃ©ly, Deputy Chief Executive of Hungary’s Government Debt Management Agency – AKK). If this were to be the case the next time the government would need to resort to the IMF’s stand-by arrangement would be in 2010. On the other hand, the next tranche of European Union’s share of the bailout would still be drawn.
Now perhaps if I were not so focused on what is happening in Latvia nothing here would strike me as odd. But there is a pattern which does seem to be repeating itself, with both Latvia and Hungary ceasing to be dependent on IMF funding. In fact the 1.43 billion euro June tranche of the IMF loan was already drawn by the National Bank of Hungary and not the government. The key difference is that when the NBH draws on the credit facility, the money drawn does not increase the level of government debt, although it does raise the stock of foreign exchange reserves, and thus provide added protection against speculative attack. The loan on the one hand cannot be used to finance the budget deficit, but on the other the IMFs hand is weakened in negotiations about structural reforms etc.
AndrÃ¡s BorbÃ©ly is even quoted as saying that it is possible Hungary will not need not to resort to any more IMF help this year, as its access to market-based financing has increased given the successful Eurobond issuance last week, which could become a substitute for the next IMF tranche of about EUR 1.5 bn due in September. At the same time, the government is still planning to draw on the credit facility made available by the European Commission. So is it just me, or is there actually an institutional backdrop to all this? Certainly having the IMF take responsibility for EU states never made a great deal of sense to me, but with the EU Commission now assuming a large chunk of Latvian sovereignty, and with the same possibly about to happen to Hungary, not to mention other CEE states, and Ireland, Greece and Spain, are we not, perhaps on the point of witnessing an epoch making tectonic shift in EU institutional architecture? And all without anyone visibly being aware that it was in fact taking place.