The Hungarian debt management during the EU enlargement

The Hungarian debt management during the EU enlargement process András Réz General Manager ÁKK Rt.

Economic and Financial Convergence Inflation Budget deficit Debt/GDP Convergence of long-term rates Market development Market harmonisation

Inflation

Budget Deficit as Percentage of GDP The 2002 figure excludes one-off items related to the introduction of the ESA 95

Debt level below 60% and the share of marketable debt increased

Convergence of Long-term Rates

Economic and Financial Convergence II. Convergence process steady until 2002 Large FX and debt market fluctuations in 2003 – short and 10 y spreads increased Macroeconomic figures are not good Government economic policy targets meeting maastricht criteria and early EMU membership

EU and EMU-Convergence The real change comes with EMU-membership Market harmonisation Market development Main goal: Creation of a competitive, efficient and EMU- compatible government bond market

Market Harmonisation: Conventions Price quotation Settlement circle Coupon payment frequency Yield calculation Business days (TARGET) (in EMU) Redenomination (in EMU)

Market Development Auctions (Rules and Frequency) Product innovation Secondary market Primary dealers Foreign investors

Auctions General experience in EMU: • with the declining gross borrowing requirements (deficit and maturities) less bond auctions and larger amounts • more active use of buy-backs and T-bills Hungary: • Borrowing need still high • 154 auctions in 2002, reverse auctions (25) • No. of auction was decreased in 2003, but gradually.

Product Innovation 3, 6 and 12 month T-Bills 3, 5, 10 and 15 year bonds Less bond series (4 new bond series in 2003) Larger sizes of the individual bond series 2001 EUR 1. 5 bn Increasing liquidity

Secondary Market Primary dealers (13 in 2002) Increasing role of reverse auctions Securities lending (from 2004) Repo facility (from 2004) and more active liquidity management Electronic trading system

Foreign investors Foreign holdings equal to HUF 1800 billion An increase of HUF 730 billion in 2002 5% T-Bills – 95% Bonds Approximately 50% of the marketable bonds Average maturity 3. 5 years

Foreign currency debt 25% of total debt is in foreign currencies Main focus on benchmark bond issues in the single European market A medium term aim to develop the European market for Hungarian debt in euro 1 -2 benchmark bonds of min. 1 bn euro New Euro. MTS platform – more transparent secondary market

The Public Debt Portfolio Public debt : HUF 9224 billion Approximately 54% of GDP Domestic debt 75%, foreign debt 25% Loans 19%, bonds 81% Average maturity: 2. 33 years (HUF marketable) Duration: 1. 95 years (HUF marketable)

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