* Forint up after losses, helped by stronger euro/dollar
* Correction may be short-lived as uncertainty looms
* Hungarian bonds stable, T-bill tender cut by HUF10 bln
(Adds Hungary PM comments, traders, updates prices)
By Marius Zaharia
BUCHAREST, July 20 (Reuters) - The forint recovered some of
the previous session's losses on Tuesday, but Hungary's dispute
with international lenders still weighed on the market,
prompting the government to cut a debt tender.
Hungary reduced its 3-month T-bill auction by 10 billion
forints to 35 billion, and the average yield rose 19 basis
points from a week ago to 5.47 percent, highlighting concerns
over the suspension of talks with the IMF and the EU over the
weekend. []
The forint, however, gained ground after it had plunged by 3
percent on Monday, helped by morning gains for European stocks.
It rose 1.1 percent from Monday's close to 287.6 per euro.
Prime Minister Viktor Orban said Budapest would stick to its
international commitments, but declined to comment on the
forint's fall after the breakdown of the talks, which were aimed
to review a funding deal with the IMF and the EU.
"We see mild gains, Orban's speech seems to have soothed
markets, although we thought he was less than friendly in his
remarks about the IMF. But the dollar is gaining and that is
more likely to set market trends in the near term," said one
trader.
"I would expect mild gains to continue to EUR/HUF 286 in the
next couple of days, although for sustained gains we would need
for investors to realise that there has been no fundamental
economic change in Hungary beyond the government's politicking
ahead of local elections (on Oct. 3)."
Orban, who plans no austerity measures and wants to put a
levy on banks, said the country had a commitment to cut its
budget gap to 3.8 percent of gross domestic product this year
but did not have to follow any particular road set by the IMF.
Analysts say the Hungarian government is probably playing
tough with international lenders to prove itself to its voter
base ahead of the local polls and will probably reach an
agreement with the IMF and the EU eventually. []
The European Bank for Reconstruction and Development warned
of a contagion risk for the region, but the Polish zloty and the
Czech crown have so far been spared any significant losses.
The zloty <EURPLN=> and the crown <EURCZK=> were virtually
flat, while the Romanian leu <EURRON=> was 0.4 percent lower.
CDS spreads -- the cost of insuring Hungary's debt against
default -- narrowed by 6 basis points from Monday's levels,
Markit data showed. Bonds were stable in thin trade across the
region, while stock markets were slightly higher.
CUTTING AUCTIONS
Without an IMF/EU deal, Hungary, which runs central Europe's
highest public debt at about 80 percent of gross domestic
product, will not be able to use remaining funds in its 20
billion euro loan secured in 2008.
But even so, and even if some debt auctions fall short,
Hungary is not under immediate financing pressure. The
international aid deal is a credibility anchor for foreign
investors that helps to keep funding costs under control.
Cutting auctions is not unusual in central Europe, which is
in a far better debt position than many euro zone countries.
"Three-month yields at the auction came in way higher than
before, and the market has begun to price in rate hikes, the
likelihood has increased for sure, which is reflected in FRAs
and short-term yields as well," said a Hungarian debt trader.
"The chance for an attack on the forint has increased mildly
and that will force the government to come to an agreement with
the IMF after the Oct. 3. elections at the latest, to prove to
markets, more than anyone, that they are capable of grown-up
policymaking."
Hungary's central bank kept interest rates at 5.25 percent
on Monday, but made clear it was ready to intervene in currency
markets to defend the forint, adding it may also raise interest
rates if needed. []
Forward rate agreements (FRAs) -- which track market
expectations for moves in official interest rates -- are pricing
in rates of around half a point higher within the next six
months.
In Poland, the central bank releases net inflation data at
1200 GMT but that is likely to have little market impact.
In the Czech Republic, the market was quiet ahead of
Wednesday's offering of 8 billion crowns worth on 9-year bonds
<CZ9YT=RR>.
--------------------------MARKET SNAPSHOT--------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2010
Czech crown <EURCZK=> 25.359 25.332 -0.11% +3.78%
Polish zloty <EURPLN=> 4.129 4.131 +0.05% -0.61%
Hungarian forint <EURHUF=> 287.53 290.76 +1.12% -5.98%
Croatian kuna <EURHRK=> 7.236 7.208 -0.39% +1.01%
Romanian leu <EURRON=> 4.272 4.259 -0.3% -0.81%
Serbian dinar <EURRSD=> 104.98 104.78 -0.19% -8.67%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR +10 basis points to 106bps over bmk*
7-yr T-bond CZ7YT=RR 0 basis points to +119bps over bmk*
10-yr T-bond CZ9YT=RR -1 basis points to +135bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond PL2YT=RR +7 basis points to +397bps over bmk*
5-yr T-bond PL5YT=RR +4 basis points to +374bps over bmk*
10-yr T-bond PL10YT=RR +3 basis points to +318bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond HU3YT=RR +3 basis points to +591bps over bmk*
5-yr T-bond HU5YT=RR +4 basis points to +562bps over bmk*
10-yr T-bond HU10YT=RR -1 basis points to +475bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1554 CET.
Currency percent change calculated from the daily domestic
close at 1600 GMT.
(Reporting by Reuters bureaus, writing by Marius Zaharia and
Jan Lopatka; editing by Stephen Nisbet and Patrick Graham)
