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Stretching Hungary's debt

A declining budget deficit and rising savings have given Hungarian corporates their first chance to launch medium-term domestic bonds. Will any of them follow the lead of Pannon? Henry Copeland reports

If economists fret when governments crowd out corporate borrowers, Hungary offers an example of what happens when the government retreats and corporates rush into the debt markets. In theory, the result should be pleasant. The reality, at least in Hungary, is less simple.

The Hungarian government's deficit surged throughout the 1990s, rising from nothing at the beginning of the decade, to Ft378 billion ($2.1 billion) in 1995 ­ the equivalent of 6.9% of GDP. Last year the government began to cut spending while economic growth boosted tax revenues, so much so that the deficit declined to Ft225 billion (3.3% of GDP), while domestic financial savings surged to Ft580 billion.

"Conditions for corporate bonds have improved dramatically in the past year, both in the widening of the institutional investor market and the limited supply of government bonds," says Domonkos Koltai, a corporate finance executive at ING Barings.

But significant regulatory hurdles need to be overcome before a corporate bond market can take off, says Koltai. And there needs to be some consensus about inflationary expectations for a yield curve to take shape. Moreover, investors are inured to government debt and need to develop a taste for corporate offerings.

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