Hungary’s Orban Takes Eurobonds to the Brink of Extinction


(Bloomberg) -- Viktor Orban’s latest bid to free Hungary’s markets from what he sees as the shackles of foreign influence could cost local money managers dear.

The populist prime minister’s government aims to double the volume of retail bonds offering market-beating interest rates that are sold directly to households. By luring 5.5 trillion forint ($19.4 billion) of savings into treasury coffers, Hungary’s exposure to Eurobond markets will be largely eliminated, though asset managers’ investments in forint debt will also be curbed.

Hungary’s Orban Takes Eurobonds to the Brink of Extinction

This self-sufficiency drive is the latest headwind for a financial industry struggling to keep a foothold in an economy that’s been subjected to repeated state intervention under Orban, including the nationalization of about 3 trillion forint of private pensions in 2011. The latest pivot means fund managers will wrestle to retain clients and match returns on retail notes that start out 130 basis points higher than regular bonds, and only climb from there.

"The government is effectively swapping cheap institutional funding for more expensive retail notes," said Sandor Vizkeleti, president of the Association of Hungarian Investment Fund and Asset Management Companies, or Bamosz. "Bond funds will no longer be competitive, leading to outflows and a reduction in institutional holdings of Hungarian debt.”

Bond Flagship

Speaking in February, Orban renewed his call for debt autarky, saying “Hungary’s government debt has to be in Hungarian hands.”

The Debt Management Agency will start marketing a flagship retail bond from July, offering holders an initial 3.5 percent in the first year and rising to 6 percent in the fifth. That compares with a 2.18 percent yield on Hungary’s traditional 5-year government bonds.

While households will be able to buy the securities directly from the government or banks, institutional investors won’t have access.

"Obviously the retail bonds will carry a higher interest rate, but we are eliminating risks from both exchange rates and the erratic foreign investors," said Gabor Gion, the state secretary responsible for debt management. Interest will also stay with Hungarians, which will boost consumption, savings and tax revenue, he said.

Mature Phase

Hungarian investment firms managed a total of 6.16 trillion forint in funds at the end of 2018, largely unchanged form a year earlier, according to Bamosz data. The volume of savings held in designated bond and money-market funds fell by about 18 percent to 1.83 trillion forint over the period.

That reflects an economy entering a mature phase of the cycle, with inflation and bond yields ticking higher, and home prices clocking a third straight year of double-digit growth in 2018.

"Naturally, we are unhappy about any development that distorts market competition," said Zsolt Barna, the Chairman of OTP Bank Nyrt.’s Fund Management unit, Hungary’s largest with the equivalent of $3.61 billion in assets. "But we are ready to up our game."

Orban is no stranger to interventions aimed more at voters than investors. He repaid a International Monetary Fund loan ahead of schedule to avoid increased scrutiny of his policies, despite it being a source of cheap funding. Banks took a battering when he relieved households of foreign-currency mortgages that had ballooned as the forint tumbled. The central bank has ensured that trillions of forint of domestic bank cash goes into government bonds.

And the latest effort will see Hungary expand what is already one of the biggest retail debt markets in Europe, at more than 20 percent of the total.

"Asset management firms will have to move toward riskier funds that have a potential for higher returns," said Bamosz’s Vizkeleti, who is also the Chief Executive Officer of Amundi SA’s local fund unit. Hungarian investors have traditionally preferred low-risk funds, he said. "That means more investments in stocks or foreign bonds."

©2019 Bloomberg L.P.

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