East European Currencies: Forint Advances Most Since June 2007

By Ewa Krukowska

Oct. 16 (Bloomberg) -- The Hungarian forint rose the most in almost 16 months against the euro after the European Central Bank agreed to lend Hungary's central bank as much as 5 billion euros ($6.7 billion) to help revive the local credit market. The Turkish lira fell versus the dollar.

Concern that Hungary's economy would collapse amid the global financial crisis pushed the forint down to a two-year low earlier today and sent the benchmark stock index to the weakest level in almost four years.

``The sentiment against the forint improved today after the agreement with the ECB,'' said Radoslaw Bodys, central European economist at Merrill Lynch in London. ``But risk aversion is high and investors will stay nervous given Hungary's high external exposure, including current account deficit and loans denominated in foreign currencies.''

The forint rose as much as 3.8 percent to 261.46 per euro and traded at 263.63 as of 11:37 a.m. in Budapest. The currency yesterday sank 7.1 percent to 271.84, the biggest drop since the debut of the euro in 1999.

The ECB agreed to repo transactions with the Hungarian central bank to facilitate access to cash after demand on the government bond market dried up and commercial banks this week suspended foreign-currency loans. In repo transactions, securities are sold for cash with an agreement to be repurchased at a later date.

`Significantly Ease'


``We suspect that Hungarian bonds will be used in the repo agreement with the ECB,'' Martin Blum, head of emerging-markets economics and currency strategy in Vienna at UniCredit SpA, wrote in a client note. ``In other words Hungarian banks will get euros from the ECB in exchange for their bond holdings. If this is confirmed that would clearly be a positive for the bond market and would significantly ease the foreign exchange liquidity shortage in the local banking sector.''

The government, which has also lined up potential funding from the International Monetary Fund, is preparing new measures to help the stock, bond and currency markets, Finance Minister Janos Veres said, without giving any details. He reiterated that the government will cut the budget deficit faster than planned.

Earlier this week, the central bank launched daily currency swap tenders to boost liquidity as investors withdraw from riskier assets in a flight to safety. Wide current account deficit and a slower growth rate than in other central European countries make Hungary highly vulnerable to worsening sentiment.

Hungarian banks are ``facing sharply higher financing costs and reduced access to international markets,'' Standard & Poor's said yesterday, putting Hungary and Ukraine's credit ratings on review for downgrades.

IMF Help

Those two countries have joined Iceland as the only European states to turn to the IMF for help as investors withdraw from riskier assets in a flight to safety. Hungary's debt is rated BBB+, the third lowest investment-grade rating.

``We see a significant risk of contagion to other central and eastern markets,'' Lars Christensen, chief analyst at Danske Bank in Copenhagen, wrote in a client note today. ``At the moment there are no safe havens in central and eastern Europe and we continue to recommend hedging all foreign exchange exposure to the region.''

Elsewhere, the Turkish lira fell 0.4 percent to 1.4725 against the dollar, dropping to a two-year low. It declined 0.4 percent to 1.9827 per euro, its weakest level since the beginning of May.

The Polish zloty increased 1.7 percent to 3.5474 against the euro and the Czech koruna rose 0.4 percent to 24.772 per euro.

The Romanian leu advanced 1.2 percent to 3.7656 per euro and the Slovak koruna was little changed at 30.490 against the single currency.

To contact the reporter on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net