LONDON: The Hungarian forint skidded more than 1 percent against the euro on Monday after Budapest requested help from the IMF while Egypt’s debt insurance costs blew out 60 basis points to 2-1/2 year highs as pre-election violence accelerated in Cairo.
Broader emerging stocks fell 2 percent, reflecting risk aversion as investors fretted about debt woes in Europe and the United States.
The forint pulled back after hitting three-week highs last week, after both the IMF and the European Commission said they had received a request for possible financial assistance from Hungary, a move that could avert a sovereign ratings downgrade to junk. Hungarian CDS rose 9 bps to 590 bps.
Hopes of IMF aid boosted the forint last week by 2 percent while bond yields fell around 40 basis points. But analysts predict Budapest will not get the kind of flexible IMF credit line it is seeking, meaning there could be more volatile ahead.
"We remain highly skeptical that the government will accept the strings attached to an IMF deal," Societe Generale analysts said in a note. "Let us see how long the government can keep the warm positive feeling towards forint assets going. We fear that it might not last all that long."
They advised clients to stay short forint versus the Turkish lira and Polish zloty.
In Egypt, markets have taken a beating as three days of clashes between police and anti-military protesters have killed more than 30 people in Cairo and other cities in some of the worst violence since the overthrow of Hosni Mubarak.
That has fuelled a jump in Egyptian credit default swaps with the cost of insuring Egyptian sovereign debt against default rising 60 bps to 525 bps on Monday, the highest since March 2009.
The Cairo stock market fell 3 percent, bringing year-to-date losses to over 45 percent while the Egyptian pound slipped towards last week’s lows of 5.9890 per dollar that marked the weakest levels since January 2005.
Markets also expect significant depreciation in coming months, with non-deliverable forwards pricing in a roughly 5 percent fall in the pound in the next three months.
"There is a combination of factors affecting the Egyptian market: the violence that we saw over the weekend, Egypt’s external account situation and central bank reserves which are looking increasingly vulnerable," said Dina Ahmad, emerging markets strategist at BNP Paribas.
"If the violence continues and investors continue to pull money out of Egyptian T-bills, is the central bank able to defend the pound? We seem to be moving to critical point," Ahmad said, noting central bank reserves had dwindled by $24 billion over the past year.
Egypt’s finance minister said recently that local banks had nearly reached the maximum they could lend to cover the budget deficit, which has been inflated by demands for higher spending in the wake of Egypt’s uprising early this year.
The fears have finally forced Egypt to admit it will need assistance from the International Monetary Fund after turning down an aid package earlier this year. Cairo is to start negotiations for a new $3.2 billion financing package, the finance minister said on Sunday.
Broader emerging markets were also weak, reflecting risk aversion as investors fretted over out-of-control debt in Europe and the United States, with MSCI’s benchmark emerging equities index down almost 2 percent, bringing year-to-date losses to more than 20 percent.
Emerging sovereign dollar bonds saw yield spreads over US Treasuries widen 6 bps to 421 bps.
Weaker euro zone states Italy and Spain are continuing to suffer wider yield spreads over safe-haven Germany, while a US deficit reduction committee looks set to miss its deadline to find $1.2 trillion in budget cuts over the next decade.
Gulf bond plans
The Polish zloty and Czech crown slipped 0.4 percent against the euro.
The zloty resumed its weakness even though ratings agencies said Poland’s structural reform plan unveiled last week was positive for the country’s creditworthiness. But they stressed an upgrade would be subject to implementation.
Citi analysts advised paying short-end of the Polish curve, noting pressure on the exchange rate and no let-up in inflation any time soon.
"There is interest to pay short-end by foreign players and we believe that might continue in the medium term," Citi added.
There was good news for Kazakhstan however as Fitch upgraded the country’s sovereign credit rating one notch to BBB, with a positive outlook.
On the issuance front, there appeared to be little impact from events in Egypt on bond plans from Gulf entities. Abu Dhabi’s national energy company Taqa mandated banks for a new dollar bond and United Arab Shipping Company, owned by a group of Gulf states, is holding roadshows for a possible deal next week.