ECB, Hungarian Central Bank Set Up Line for Euro Liquidity

(Bloomberg) -- The European Central Bank set up a facility to provide euro liquidity to Hungary’s financial institutions to tackle any possible shortages in case of market dysfunctions caused by the pandemic.

The 4 billion-euro ($4.6 billion) repo agreement line with Hungary’s central bank will remain in place until June 2021 unless an extension is decided, the ECB said on Thursday. The maximum maturity of each drawing will be three months.

Hungary’s central bank is joining counterparts in Albania and Serbia that last month set up their separate repo lines with the ECB. Romania made a similar arrangement in June. The agreements provide euros in exchange for adequate euro-denominated collateral.

“This repo line is a preventive measure in case the pandemic hits again,” said Peter Virovacz, economist at ING Bank NV in Budapest. “The country’s central bank, as a last resort can only provide euro liquidity from its reserves but that would potentially strain the stability of Hungary’s financial system if the situation turned again for the worse.”

Hungary’s central bank had 30.2 billion euros in its international reserves at the end of June, up from 28.4 billion at the end of last year.

The forint strengthened against the euro by 0.2% to 347.26 after the announcement. Hungary’s benchmark BUX equity index extended its advance to climb as much as 0.8%.

Support Network

Since the pandemic struck, the ECB has spun a web of support lines for countries outside the currency area to prevent any market turbulence stemming from a sudden surge in demand for euros. Last month, it set up a precautionary facility to provide funds against the collateral of euro-area government bonds and suprantional institutions.

In April, the ECB arranged currency swap lines with Croatia and Bulgaria, which since then joined the pre-euro waiting room.

Some central banks across emerging markets have seen their reserves dwindle in the wake of the pandemic as households and businesses sought more hard currencies, mainly U.S. dollars, to service foreign debt.

Separately, the Hungarian central bank said it now has access to as much as 10 billion euros through bilateral swap and repo agreements, including with the ECB, the People’s Bank of China, the U.S. Federal Reserve and the Bank for International Settlements.

“The safety net created by the above agreements, ensures additional foreign currency liquidity over central bank reserves,” it said.

“By building the safety net, the bank has significantly increased its room for maneuver, thereby it is able to give a quick and firm response to potential tension emerging in any sub-market while maintaining safe levels of international reserves.”

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