Hungary suffered its second debt auction failure in the space of two months on Tuesday as fears rose over the country’s commitment to economic reforms.

Investors boycotted an auction of short-term bills because of alarm over a dispute between Budapest and the International Monetary Fund, which led a €20bn ($25.8bn) financial bail-out of the country in November 2008.

Hungary is reluctant to give ground in a fiscal stand-off with the IMF and the European Union. Ahead of municipal elections in October, the ruling Fidesz party is desperate not to upset voters. The IMF and EU have warned Hungary its austerity measures look too short-term and insisted the government must rethink its plans.

The auction of three-month bills sold only Ft35bn ($157m), well short of its Ft45bn target. The average yield on the bills rose to 5.47 per cent compared with 5.28 per cent at the last auction a week ago.

Investors insisted, however, Hungary was in a strong position because of reforms it had already put in place. Its budget deficit is forecast at 3.8 per cent this year, while its debt to gross domestic product is forecast at 78 per cent.

Robert Beange, a strategist at RBC Capital Markets, said: “Hungary’s economy has seen a big improvement. The auction failure is about perception rather than economic reality. Hungary will survive this.”

Reinhard Cluse, economist at UBS, added: “It is a warning sign for Hungary, but I think you will see the country step up its commitment to reforms once the municipal elections are over. This should not be a long-term problem.”

Hungary has healthy central bank reserves after drawing on about €14bn of IMF, European Union and World Bank loans.

It has also been able to access the private markets because of rising confidence in its economy.

Separately, Greece sold €1.95bn of three-month bills, but had to pay a yield of 4.05 per cent compared with 3.65 per cent for the previous issue in April.

The bonds had been subscribed 3.85 times compared with 3.64 times for last week’s issue of six-month paper, the Greek debt management agency said.

Debt managers rolled over €1.5bn of three-month bills and accepted another €450m in non-competitive bids. Petros Christodoulou, head of the debt management agency, said: “This was a satisfying second issue . . . It was bigger and had a higher cover than the previous six-month deal.”

Greece returned to the capital markets last week for the first time since its bail-out in April by the EU and IMF. It raised €1.62bn of six-month paper at an average yield of 4.65 per cent.

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