Hungary to remove incentives for banks buying state debt

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Hungary’s central bank will review whether to remove incentives it has provided for commercial banks to buy government debt after yields plunged to record lows and government foreign-currency debt trail off.
The National Bank of Hungary will reassess the need to continue providing interest-rate swap facilities to banks, Vice Governor Marton Nagy said in an article on Portfolio website. The regulator had assumed some of the interest-rate risk of banks buying longer maturities of government debt under its Self-Financing Program.
Interest-rate swaps have been part of the Hungarian central bank’s unorthodox monetary arsenal, which has helped push commercial bank liquidity from deposits parked at the regulator into the debt market. Yields on the country’s 10-year bonds fell below those on equivalent Polish notes for the first time in 14 years this week, helped by the re-starting of interest-rate cuts in March.
“The Self-Financing Program has come to a tipping point in 2016 because it has reached its goals and its effectiveness has thus been reduced,” Nagy said in the article, citing a drop in maturing foreign-currency debt.
The government has reduced its foreign-currency debt to near 30 percent of overall borrowing, Nagy said. That’s down from a peak of 50 percent hit in 2011, according to figures given by Economy Minister Mihaly Varga this month.
Encouraging banks to buy forint-denominated debt has helped push the yield on Hungary’s 10-year government notes more than 40 basis points lower in the last 12 months to 2.95 percent on Friday, even as foreign investors sold 28 percent of their forint holdings. The country’s notes handed investors a 5.8 percent return over the period, outperforming the debt of peers Romania and Poland, according to data compiled by Bloomberg.
Policy makers pledged to keep easing monetary conditions last month after lowering the main rate to a record 1.2 percent from 1.35 percent. The first rate cut after a seven-month pause, the decision defied predictions of 18 of 19 economists who had forecast no change and reversed a pledge to keep its benchmark rate on hold until the end of 2017.
With price-growth well below the central bank’s 3 percent target, policy makers turned to reducing borrowings costs and boosting the share of domestic financing to make the country less vulnerable to exchange-rate swings. Authorities last year pushed banks to convert household foreign currency mortgages into forint.
and set about boosting commercial bank take-up of local debt.

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