We incurred debts cheaply, but it could be better
Hungary issued foreign currency bonds on particularly favorable terms last week, with half of the total of € 2.5bn being 10 years and half being 30 years. The former had an annual coupon of 0.5% and the latter 1.5%, which is a record low. As the bonds were not issued at the rate of 100%, the actual yield was slightly higher and amounted to 0.64 and 1.66%, respectively. This is due to two reasons:
- On the one hand, the global profitability environment is very low, with central banks flooding the market with money even at zero interest rates.
- On the other hand, Hungary’s perception of risk has significantly improved in recent years.
As announced by ÁKK, the funds will be used to pre-finance foreign currency maturities in 2021, but on Friday morning Prime Minister Viktor Orbán has already said on Kossuth Radio that the funds raised will be used to repay existing foreign currency loans and Hungary will not lose its development due to the fund’s veto corrective.
Apparently, this would be a cheaper source than a currency bond: from the Next GenerationEU resolution fund, Hungary would be entitled to a total of € 10bn in loans and € 7.6bn in subsidies. However, this week the Hungarian government vetoed a joint European bond on a new seven-year budget on the grounds of the rule of law, although this is not a final veto.
Why was he vetoed?
For now, no one can say what the profit would be on the 30-year common EU bond as investors will also be valued at minus 0.2 percent German and 1.5 percent Italian yield. On the other hand, it is almost certain
The EU could now enter the market at a lower interest rate than Hungary.
It is estimated that under the current conditions the EU could issue bonds worth 0.1-0.2%, i.e. we could borrow less than 1.66% of Hungary’s 30-year profitability level as Hungary would be eligible for a loan of € 10bn from that perspective that they could take at any time. . Quantitatively, this means that the country will pay 20.7 million euros annually in interest on the 1.25 billion euros of 30-year Hungarian currency bonds, and if the interest rate on the EU loan is set at 0.15%, only 1 will be paid for the same amount. EUR 9 million. would be an annual interest rate.
The difference is thus 18.8 million euros per year, at today’s exchange rate around 6.8 billion forints.
Over the entire period, this means additional expenses of more than 200 billion HUF at today’s exchange rate. However, the amount of HUF 6.8 billion is still insignificant, with total annual public interest expenditure of around HUF 1,000 billion, which is less than one percent.
But why was it worth vetoing and exiting the market instead of a cheaper EU fund?
Of course, debt management should never be viewed only from a financial point of view, because if only interest mattered, we would finance ourselves with short securities in foreign currency. There are basically two problems with the Next GenerationEU fund:
- On the one hand, the bond based on it has not even been issued, its yield can only be estimated. If a compromise agreement is reached now, resources could not be available until mid-2021. And if Hungary needs funds sooner, it may not be worth waiting for a cheaper loan. However, we will have USD 1.6bn in foreign currency bonds with maturity at the end of March, while there is no chance that the EU loan will be available. Moreover, it is difficult to predict what the market environment will look like in the spring of next year, when the common bond may be issued. There is a risk that the final condition will be less favorable than can currently be estimated.
- On the other hand, the Hungarian government has clear political reservations as it vetoed the establishment of the rule of law in Brussels. The market, on the other hand, does not demand any guarantees of the rule of law or value any objections in this respect.
In other words, Hungary was looking forward to the joint issuance of European bonds, the money had to be pre-financed in advance and the government refused to accept political conditionality. According to signs, the resistance and fattening of financial reserves is worth several billion forints a year to the government, which is otherwise negligible for the budget as a whole and interest expenditure.
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