How much does Hungary lose by borrowing foreign currency from the market instead of the EU fund?

We got into debt for little money, but it could be more favorable

Hungary issued foreign currency bonds on particularly favorable terms last week, with half of the total paper of 2.5 billion euros at 10 years and half at 30 years. The first had an annual coupon of 0.5% and the second of 1.5%, a record low. Since the bonds were not issued at a 100% exchange rate, the real yield was slightly above 0.64 and 1.66%, respectively. This is due to two reasons:

• On the one hand, the global performance environment is very low, with central banks flooding the market with money even at zero interest rates.
• On the other hand, Hungary’s risk perception has improved a lot in recent years.

According to ÁKK’s announcement, the financing will be used to pre-finance the 2021 foreign currency maturities, but on Friday morning, Prime Minister Viktor Orbán already spoke on Kossuth Radio that the funds raised will be used to repay existing currency loans. foreign and Hungary will not lose development due to the veto of the recovery fund.

It would appear to be a cheaper source than a foreign currency bond: from the Next GenerationEU recovery fund, Hungary would be entitled to a total of € 10 billion in loans and € 7.6 billion in grants. However, the common European bond was vetoed by the Hungarian government this week over the new seven-year budget due to the rule of law, although this is not the final veto.

Why was it vetoed?

For now, no one can say what the return on a joint 30-year EU bond would be, as investors will also be priced minus 0.2% in Germany and 1.5% in Italy. On the other hand, it is almost certain that

the EU could now enter the market at a lower interest rate than Hungary.

It is estimated that in the current environment, the EU could issue bonds of 0.1-0.2 percent, that is, we could borrow less than 1.66% of the Hungarian 30-year yield level, since from this framework Hungary would be entitled to a loan of 10 billion euros, which it can claim at any time. . Quantitatively, this means that the country will pay € 20.7 million per year in interest on the Hungarian foreign currency bond of € 1.25 billion for 30 years, and if the interest rate of the EU loan is set at 0 , 15%, only 1.9 million euros will be paid for the same amount. euros would be the annual interest rate.

The difference is therefore 18.8 million euros per year, calculated at the current exchange rate of about 6.8 billion guilders.

Over the entire period, this means an additional expense of more than HUF 200 billion at the current exchange rate. However, the HUF 6.8 billion amount is still a negligible amount, with total annual public interest spending of around HUF 1 trillion, less than one percent of it.

But still, why was it worth vetoing and exiting the market instead of a cheaper EU fund?

Of course, debt management should never be seen solely from a financial point of view, because if only interest mattered, we would be financing ourselves with short papers in foreign currency. There are basically two problems with the Next GenerationEU fund:

1. 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, the resource could be available by mid-2021 at the earliest. And if Hungary needs the funds before then, it may not be worth waiting for a cheaper loan. However, we will have $ 1.6 billion in foreign currency bonds due at the end of March and in the meantime, there is no chance that EU credit will be available. Furthermore, it is difficult to predict what the market environment will be like next spring, when the joint bond can be issued. There is a risk that the final condition will be less favorable than can now be estimated.
2. On the other hand, the Hungarian government clearly has political reservations, as it has vetoed the establishment of the rule of law in Brussels. The market, on the other hand, does not ask for guarantees of the rule of law nor does it quote reserves in this regard.

In other words, Hungary could not wait for the joint issuance of European bonds, the money had to be pre-financed earlier, and the government did not want to accept political conditionality. According to the signs, the resistance and the fattening of financial reserves are worth a few billion guilders a year to the government, which is otherwise an insignificant amount for the budget as a whole and interest expenses.

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