by Lady Michelle-Jennifer Santos, Chief Visionary Founder & Owner
August 12, 2013 (TSR) – The Central Bank of Hungary has repaid its outstanding €721 million debt to the International Monetary Fund (IMF) ahead of schedule, clearing the way for the Fund to close down its representative office in Budapest at the end of the month as the country will no longer tolerate meddling in its domestic affairs.
As requested by the IMF, the payment was made in US dollar, euro and pound. The Government Debt Management Agency (ÁKK) has transferred USD 1.1 bn, EUR 500 m and GBP 260 m to the Fund from the part of the loan that had been drawn from the IMF but had not been used, from the USD bond issuance in early February and proceeds from the sale of the Premium Hungarian Euro Government Bond (PEMAK) therefore no supplementary bond issuance was necessary.
Of this sum EUR 1.8 bn were due in 2013, EUR 300 m in Q1 2014 and a marginal tranche in Q3 2014. The earlier bond issuances and the government’s reserves are sufficient to clear the outstanding repayment obligation ahead of schedule.
The repayment wipes the slate clean between the Central Bank of Hungary and the IMF, and the Hungarian authorities are keen to reduce the fund’s presence in the country due to its meddling of domestic affairs.
The central bank’s governor, György Matolcsy, informed the IMF’s managing director, Christine Lagarde, of his plans to close the fund’s Budapest office last month.
Hungary’s Economy Minister Mihály Varga has also notified Reza Moghadam, Director of the IMF’s European Department in a letter on 25 July that the country intends to repay a credit taken out in 2008 before it becomes due, by 12 August 2013.
The decision to repay the debt “ahead of schedule” is no surprise, as several government officials, including the Prime Minister and Varga himself in an interview with Portfolio.hu last month, have already indicated that intention.
The ministry noted that early repayment is available for those countries that possess “an appropriate level of reserves, disciplined fiscal policy and favourable perception by investors.”
Given that Hungary meets all these conditions it has the opportunity to clear its IMF debt before it becomes due, the ministry added last month.
An IMF spokesperson acknowledged the Fund’s presence in its member countries “is at the invitation of that country’s authorities” and hence it “will not seek the replacement of the resident representative [Iryna Ivaschenko] when her mandate expires” at the end of August.
Under Hungary’s stand-by arrangement (SBA) with the IMF, the central bank drew down 1.26 billion special drawing rights (SDRs) – worth €1.44 billion – in 2009. It began paying back the loan in 2012 and cleared its remaining obligations earlier this week.
András Balatoni, a senior economist at ING Bank, said the central bank had been losing money by holding the SDRs, as the cost of sterilising them was “very high”.
By repaying the debt back early, he explained, the central bank was seeking to minimise its – and the government’s – losses. The Central Bank of Hungary recorded a loss of 39.8 billion forint (€130 million) in 2012.
The ministry said some HUF 3.5 bn debt service costs could be saved on the repayment.
The Hungarian authorities will retain a relationship with the IMF – they will remain members and conduct “regular bilateral consultation”, according to the Fund – but the closing the IMF’s Budapest office is emblematic of the Hungarian authorities’ recent attitude towards the institution.
Balatoni acknowledged that the central bank’s repayment of its debt reduced the need for the IMF to have a physical presence in the country. The move will mean little to the markets, he said, and will serve more as a “message for the voters”.
The relationship between the Hungarian authorities and the IMF has been strained at the best of times during the past few years, as the government refused to comply with the conditions of its loans and the central bank this year repeatedly ignored IMF advice on monetary policy.
In its latest meeting, at the end of July, the central bank’s monetary council sanctioned a 12th successive 25-basis point rate cut as it dropped the key policy rate to 4%. In a statement accompanying its decision, the council suggested it would rein in its monetary easing on account of the growing volatility in global financial markets.
The minutes from that meeting, released last week, re-asserted that view. “The significant reductions in interest rates so far and the volatile conditions in financial markets might justify changing the pace or extent of policy easing over the coming months”, the minutes said.
According to Balatoni, the council will either continue to cut the rate by 25bp but do so more intermittently, or keep cutting at every meeting but by a smaller amount. Either way, he said, the easing cycle will likely stop when the rate drops to 3.5%.
