BUDAPEST: Hungary's central bank has begun sounding out commercial lenders on how much money they may be able to shift from central bank bills into government bonds, sources said on Monday, as part of a programme that could help cut the country's external debt.
Hungary's short-term foreign currency debt is a headache for central Europe's most heavily indebted nation.
One way of reducing it would be for the government to issue more debt in forints to replace its expiring foreign-currency debt. But to do that it wants to rely more on commercial banks to buy forint-denominated debt.
For its part, the central bank wants to cut its stock of 2-week bills, its main tool for draining liquidity from interbank markets, from the current hefty 4.56 trillion forints to around 3.6 trillion.
In a letter dated April 16, details of which several sources gave to Reuters, the bank's vice governor Adam Balog asked commercial bank executives to say how much of their banks' funds held in 2-week central bank bills could be invested in forint-denominated government paper instead.
He also asked banks how much of their short-term liabilities they could repay with euros that the central bank would provide in the form of currency swaps. That could also help reduce the country's short-term foreign-currency vulnerability.
"Your replies could greatly help to establish the final form of the (NBH) programme and its successful implementation, which is a common interest of all of us," Balog wrote in the letter, adding that the bank expected banks to reply by April 19.
The National Bank of Hungary did not immediately respond to a Reuters query about the letter.
The central bank's new Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, has launched a new lending programme to boost the economy and is in talks with banks about a plan to inject $2.1 billion worth of cheap loans into the recession-hit economy.
A top government debt agency official has said the agency would be willing to support the central bank's plans as long as the planned rise in forint debt issuance did not hurt the domestic bond market.
Last week Matolcsy said that the central bank planned to limit foreign investors' access to its 2-week facility and that only domestic credit institutions could place their funds with the central bank.
The bank's rate-setting Monetary Council, which meets on Tuesday and is expected cut rates to a record low of 4.75 percent, has the final say on such strategic issues.
After a series of rate cuts since August, Hungary's 3- and 5-year government bond yields are trading near record lows, at 4.61 percent and 5 percent, respectively.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>*
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