Hungary: Not Quite Greece?

Bloomberg reports that Hungary today sold 45 billion forint ($196 million) of three-month Treasury bills at an average yield of 5.28 percent, up from 5.26 percent at the previous auction on June 8, and “almost double the planned amount, signalling a return of investor confidence after the government’s failure to raise the full amount offered at an auction last week.”  Moreover, the forint has now gained 3.2 percent since June 4 when it hit its weakest level this year after local politicians compared the country’s fiscal strength to that of Greece asserted that the previous administration had lied about finances.

Not so fast, a piece in this week’s Economist warns.  Hungary prime minister Viktor Orban’s 29-point economic plan, introduced June 8th and which temporarily stalled a fall in the forint and a spike in borrowing costs, may yet wreak havoc.   The country, it writes, “is the most debt-ridden country in eastern Europe: its public-sector debts exceed 80% of GDP.  Cuts in public spending will have to go far beyond the gimmicky blitz on top salaries, official cars and mobile phones mentioned so far.  As in other ex-communist countries that have tried it, the flat tax will doubtless have a splendid effect, raising revenues and shrinking the black economy.  But that takes time.  The banks are already staggering under the weight of bad debts.  Hitting them with an extra tax—apparently amounting to 200 billion forints ($860m), or 0.6% of GDP—will do little to encourage lending.”

Yet many observers still scoff at the notion that Hungary and Greece belong in the same breath, owing the flippant remarks on finances more to opportunistic political manuevering than to any bona fide, lurking ailment.  Per the FT last week, for instance, “analysts say Fidesz party officials have been overly gloomy about Hungary’s finances in an effort to prepare the public for further spending cuts.”  Added an emerging markets strategist:  “There is no real financial reason that Hungary should struggle to raise money.”

High rates to hurt Magyar Telekom?

Authorities announced today that Hungary is preparing a financial aid package worth up to 600 billion forints ($3 billion, 2.3 billion euros) to boost domestic banks’ capital and help them refinance debts.  The aid package for “Hungarian banks of systemic importance” comes as part of the $25.1 billion standby loan for Hungary announced last month by the International Monetary Fund (IMF), the European Union and the World Bank.  The AP reports that “one of the risk factors for Hungary’s banking sector is the large proportion of loans given to home buyers and businesses in foreign currencies, especially in Swiss francs and euros.  With the forint’s exchange rate weakening drastically amid wide fluctuations, the risk that borrowers could default on repayments has increased.”  Fears that it would be unable to make debt payments and poor market liquidity caused the forint to temporarily lose some 40 percent of its value last month as shares on the Budapest Stock Exchange dropped to four-year lows.

The news has been particularly troubling for Magyar Telekom (NYSE: MTA), the country’s largest full-service provider of telecommunication services, which now trades some 40% off its 52-week peak.  Such a price may be appetizing to some punters, especially given the firm’s hefty dividend yield of 13.6% in 2007 and a habitually flexible balance sheet that affirms management’s stated goal to expand operations into neighboring Ukraine, Kosovo, and Bosnia.  But the IIR group, an independent research service, recommends caution, citing “intensified competition” in the mobile sector, and sluggish revenue growth in its fixed line services segment.

Moreover, when the Hungarian central bank (NBH) hiked interest rates by 300 basis points to 11.50% last month to defend the forint, Wood & Co., an analyst group, pointed out that the rate increase ate into the firm’s dividend yield, making it less attractive.  Additionally, the company’s debt, highest among the nation’s telecommunication firms on net debt/equity of 34%, is 90% in local currency, meaning that higher rates would inflict further pressure on profits and possibly reduce net income in 2009 by 6.9%.