Ukraine-Russia War Exposes Hungary as East EU’s Bond Soft Spot

(Bloomberg) -- Hungary's government bonds have been the worst-hit in the eastern European Union since Russia's invasion of Ukraine as record pre-election spending by Prime Minister Viktor Orban contributes to higher funding costs.

The yield on the 10-year Hungarian government bond surged as many as 49 basis points since the outbreak of war in Ukraine on Feb. 24 and was at 5.37% on Tuesday. That widened its spread against Poland's debt of similar maturity by 36 basis points, the Czech Republic's by 28 basis points and Germany's by 63 basis points.

Hungarian central bank Governor Gyorgy Matolcsy has repeatedly urged the government to cut spending and rein in the budget deficit to help shore up the currency. Facing tight general elections in April, Orban has hiked wages and pensions and given almost $2 billion in family tax rebates earlier this month.

The forint fell to a record against the euro, prompting the central bank to verbally intervene to stem the plunge.

“The Hungarian government budget is in a relatively vulnerable state because of high debt and deficit, and the possible growth shock due to fallout in Russia and Ukraine could lead the market to speculate further financing needs,” said ING Bank NV's Budapest-based economist Peter Virovacz.

Hungary's central bank is next scheduled to decide on its key weekly interest rate on Thursday. It's already at 4.6%, the highest nominal key interest rate in the EU.

“Investors are demanding higher risk premiums for central European assets and are rebalancing their portfolios to put a greater emphasis on countries with lower geopolitical risks,” said Concorde Securities strategist Tamas Moro.