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Hungarian central bank forces retail banks to buy government debt

In an effort to make the country’s credit ratings investment-grade again, the National Bank of Hungary is bringing a change to its policy that will force retail banks to buy the government’s debt.

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The move is also aimed at decreasing the country’s reliance on foreign financial institutions.

Starting 23 September, the bank’s short-term, main monetary policy instrument is slated to be replaced by a longer-term facility to dissuade banks from keeping excess funds at the central bank and to purchase more government bonds.

The current fixed-rate two week deposit facility will be replaced by a less flexible three-month, fixed-interest deposit.

This is being called the boldest regulatory change in Hungary’s financial market since the time when banks were forced to convert foreign-currency mortgages to forint.

The Wall Street Journal quoted the bank as saying: "Reducing external vulnerability could improve Hungary’s credit ratings, reduce its risk premia and external financing costs."

Hungarian Prime Minister Viktor Orban’s cabinet and his allies at the central bank have been working on reducing the country’s dependence on external financing due to which the nation has not been able to regain its investment-grade debt rating.

Central bank executive director Marton Nagy was quoted by Bloomberg as saying: "We’re continuing our program of self-financing, cutting our vulnerability by boosting banks’ purchases of government debt.

"Buying government debt will be much more attractive for banks."


Image: The Hungarian National Bank’s building in Liberty Square in the Inner City of Budapest. Photo: courtesy of Egrian.