Today, the Hungarian markets came under pressure after Lajos Kosa, Deputy Head of the ruling Fidesz party compared the situation in Hungary with Greece and said the economy was in a much worse state than expected.
• Adding to the negative sentiment were negative comments regarding the budget situation from Prime Minister Orban and State Secretary, Mihaly Varga. Varga said that he expected a budget deficit 7-7½% of GDP in 2010.
• Overall, Hungarian newsflow is quite concerning and even if the negative rhetoric is ‘just politics’ we advise that more bad news might well be in the pipeline. The comparison with Greece might be ‘overdone’, but one can hardly say that public finances are in good shape in Hungary.
Kosa: “Only a slim chance of avoiding a Greek-style scenario”
This afternoon market participants shocked when Lajos Kosa, Deputy Head of the ruling Fidesz party, said that the state of public finances in Hungary was such that Hungary only had a slim chance of avoiding a Greek-style scenario.
It shouldn’t be a surprise to anyone that such comments spook the markets, especially taking into account that Hungarian policy makers do not have a strong track record of being fiscally conservative. However, the key question from our perspective is whether Kosa’s comments were intended to spur the Hungarian electorate into accepting the Fidesz plans to renege on their election promises to loosen fiscal policy, or whether it was just a politician displaying honesty. From a market perspective, neither option is positive. The conclusions are that either Hungary is dangerously close to default, or that Hungarian policy makers fail to realise that political game-playing can have a seriously negative impact on the market. That said, if this is “just” politics, then the impact for Hungarian markets should be fairly limited in the longer run.
So which of the two is it? The answer is that we simply don’t know. The only established fact is that Hungary is in a very fragile economic situation and public debt levels could veer in a clearly unsustainable direction if measures to improve the budget situation are not passed.
Our view is that this clearly has the potential to develop into a very critical situation for the Hungarian markets – especially if Hungarian policy makers do not take more care in terms of their communication. In that regard, it should be noted that we have been concerned about the new Hungarian government’s verbal attacks on the Hungarian central bank management recently. Such outbursts surely also have the potential to spook investors.
The Hungarian government has said it will soon – likely over the weekend – announce new crisis measures. Such measures could calm nerves in the markets, but on the other hand, if the Hungarian government comes out and says that the budget deficit will be much larger than previously expected, then the sell-off in the Hungarian markets will likely accelerate. In that regard it should be noted that our EMEA FX Scorecard also continues to point towards a weaker forint.
We would also note that the sell-off in the Hungarian markets today has had a spill-over effect to other European markets – with both Western and Eastern European markets coming under some pressure. If the sell-off in the Hungarian markets escalates further in the coming days, then this “new fear” could become a new chapter in the European sovereign debt crisis. Hence, caution is clearly warranted for investor and European policy makers alike.
Hungarian bonds tumbled, pushing up borrowing costs by the most since October 2008, and the forint and stocks plunged after a government official said speculation of a default “isn’t an exaggeration.”
The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 149 basis points, or 1.49 percentage point, to 468, according to JPMorgan Chase & Co.’s EMBI Global Index. The BUX Index of equities tumbled as much as 8.4 percent, while the forint fell 1.7 percent to 286.74 per euro at 11:19 a.m. in New York, the weakest level since June 2009.
Credit-default swaps on Hungarian government bonds rose to 371 basis points from yesterday’s close of 308, according to CMA DataVision prices. An increase signals deterioration in investor perceptions of credit quality.
Regards,
Team Market View Investments.
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