Central European assets fell on Friday as fears of an imminent credit rating downgrade for some euro zone states prompted sales of riskier emerging market assets, while comments from the International Monetary Fund (IMF) suggested tough bailout talks ahead for Hungary.
The Hungarian forint handed back strong gains against the euro from the previous session after the Fund called for concrete steps by Budapest before it agrees to launch talks on a new aid programme. Those losses deepened and other regional markets fell back after a senior euro zone government source said credit rating agency Standard & Poor's was set to downgrade several euro zone countries, not including Germany.
The forint was bid at 310.56 against the euro, 0.7 percent down from Thursday but still well above record lows of 324.20 hit last week. "The forint is kept around 310 by the expectation that in one way or the other, at the price of complications or more smoothly, Hungary will secure a credit deal in the end," one Budapest-based trader said.
Hungarian bonds also retreated, with yields rising by some 10 basis points to around 9.55 percent on a flat yield curve, after a rebound around bond auctions on Thursday which attracted heavy foreign demand. A Reuters poll of analysts showed Hungary's bailout talks would keep a lid on Central European currencies in the next few months before a likely rebound later this year.
The forint's falls in past weeks have sent shock waves across Central Europe's emerging markets and neighbouring Austria, whose banks have heavy exposure in Hungary. The region's most liquid unit, the Polish zloty eased 0.2 percent against the euro to 4.421. The Czech crown fell over one percent from its session high reached after a sharp rise of 1.5 percent this week.
Dealers said the reports about the probable euro zone rating downgrades knocked the unit back. It was bid at 25.641, weaker by 0.3 percent from Thursday. The crown had broke through some support levels earlier this week and it had earlier traded around 25.450, in line with an upward trendline that has developed since late August. In Romania, the current account deficit shrank 6.6 percent year-on-year to 4.23 billion euros in the first eleven months of 2011, central bank data showed. The leu firmed 0.1 percent to 4.335 against the euro.