The worries …

… that attended the rise of the FIDESZ party to power have suddenly intensified as negotiations between Hungary, the EU and the IMF stopped without the lenders endorsing Hungary's budget – which is tantamount to a failure of the negotiations. This fits exactly with our theory that the next trouble spots to reignite the never-ending debt crisis saga will be the euro area periphery.


We initially over-estimated Hungary's commitment to joining the euro as a possible motivating factor to keep the austerity plans in place – evidently though the new government has more urgent things on its menu.  The new overriding motive appears to be local elections in Hungary that are to be held in early October and which the ruling party intends to win.

Bloomberg reports in this context:


“Hungary’s government won’t impose further austerity measures even after falling out with its international creditors, Economy Minister Gyorgy Matolcsy said.

The government, which faces local elections on Oct. 3, is committed to a tax on financial institutions for three years and seeks to raise 200 billion forint ($893 million) from the levy in 2010, Matolcsy said on M1 television today. “The alternative to the bank tax would be austerity measures which would restrain growth even more,” he said. The International Monetary Fund and European Union ended talks with Hungary at the weekend without endorsing the budget plans. The EU demanded “tough decisions, notably on spending,” to meet deficit requirements. The IMF said the planned tax will have a negative impact on lending and growth. The suspension of talks is rattling investor trust in Hungary barely a month after politicians from the ruling Fidesz party compared the nation to Greece, roiling international markets. The government, which swept to power in a landslide victory in April, may delay spending cuts until after the municipal elections, analysts said.”


Consequently, the Forint is plummeting against both the dollar and the euro and CDS on Hungary's debt are soaring.



Hungarian Forint vs. the USD – a large move after news of the failure of  Hungary's negotiations with the IMF become known – click for higher resolution.



The moves in the currency and CDS on Hungary's debt have been rather large for a single trading day, to put it mildly.

According to Bloomberg:


“Credit-default swaps protecting the country’s debt against nonpayment for five years climbed 47.5 basis points to 370 basis points, the most since June 7, according to CMA DataVision prices. The currency depreciated as much as 2.9 percent against the euro and was trading 2.3 percent lower at 288.74 at 9:50 a.m. in Budapest, its weakest since June 7 when comments by local politicians comparing Hungary to Greece roiled world markets.”


In fact, the most recent data show that CDS on Hungary's debt have climbed almost 50 basis points by now, making it the biggest mover in the sovereign CDS space, followed ignominiously by CDS on Austria, its neighbor and former personal union partner in the Austro-Hungarian Empire. As might be expected, Austria's banks are very much engaged in Hungary, and this is the kind of news they certainly don't need. Since markets these days automatically expect that banks in trouble will be bailed out by their home governments, the effect of such news is nowadays immediately transmitted to the sovereign debt of the country concerned.



CDS on Hungary via CMA. This is – unfortunately for Hungary and investors in its bonds – a bullish chart – click for higher resolution.



CDS on Austria's sovereign debt. This doesn't look good either. Among the so-called 'hard currency core' of the euro area, Austria is the by far most vulnerable country, as its banks have lent a multiple of the country's annual GDP to shaky debtors in the Balkans and former Eastern Bloc nations (incredibly, Austria's banks are the biggest foreign private lenders to the Ukraine for instance) – click for higher resolution.



Among today's sovereign wideners in the CDS space, we find a number of interesting names, with Romania achieving a jump into the top ten riskiest sovereign debtor entities, displacing California temporarily.



Sovereign Wideners, July 19


Entity Name 5 Yr Mid Change (%) Change (bps) CPD (%)
Hungary 366.18 +15.75 +49.83 22.69
Austria 93.36 +13.62 +11.19 7.97
Slovenia 84.61 +5.77 +4.62 7.28
Czech Republic 98.02 +5.75 +5.33 6.72
Finland 31.06 +5.35 +1.58 2.72
Ireland 261.91 +5.27 +13.11 20.31
Romania 378.53 +4.60 +16.64 23.40
Croatia 312.49 +4.00 +12.03 19.77



Ireland suddenly has come back into focus as well, as the country's adherence to its austerity program is increasingly questioned by the markets, due to the fact that Ireland's economy continues to suffer an immense contraction, mainly as a result of its burst property bubble. What is most interesting in the above table is the massive increase in the market's distrust of other sovereigns in the euro area periphery, many of whom happen to be big debtors of Austria's banks – Croatia, Slovenia, the Czech Republic, Romania, are all high up on the list. No wonder then that Austria's creditworthiness is taking such a big hit concurrently.

Bloomberg further reports on the Hungary situation:


“The IMF ended its review of Hungary’s 20 billion-euro ($25.8 billion) emergency bailout because “a range of issues remain open,” the Washington-based lender said in a July 17 statement. The government must make “tough decisions, notably on spending,” to comply with deficit requirements, the EU said. “This news is very negative,” said Gabor Orban, who helps manage $4 billion in emerging market debt at Aegon Fund Management in Budapest. “This won’t be the type of selloff where the smart investor is buying. The first reaction will be panic, then the market may calm down.”

The IMF’s statements are a blow to Prime Minister Orban’s efforts to rebuild investor confidence after ruling party officials raised the specter of a Greek-like crisis last month, driving the forint down 4.6 percent against the euro in two days. Hungary, in its fifth year of austerity measures, sought to persuade creditors to widen the country’s deficit target for next year.”


It needs to be pointed out that Hungary has been able to fund itself in the markets this year and has so far not had any need to tap the IMF-EU bail-out funds. This may explain the government's recalcitrant stance regarding the IMF's demands. It must be noted here that usually no-one is very happy to let their fiscal policy be dictated by the IMF. The IMF is ultimately a US-controlled institution, due to the US stake in the IMF being exactly of the size needed to veto any IMF decisions it doesn't like (no other single country is in that position).

Recipients of IMF 'help' are usually stung by the hypocrisy of the free-spending US government demanding (indirectly, via the IMF which it ultimately controls) austerity from everybody else. Analysts at Unicredito, RBS and Den Danske Bank however think that Hungary will ultimately have no choice but to agree to the IMF's demands.

Says Bloomberg:


“We believe the government will finally agree with the IMF/EU but it might not come before the autumn local elections,” Gyula Toth, emerging-market strategist at UniCredit SpA wrote in a note to clients. “The government will simply have no other choice in our view.” The bank retains “bearish positioning” in Hungary’s assets and may recommend selling euro against the forint in case of “exaggerated moves” around 295 against the common currency. RBS’s Ash said Hungary’s central bank may intervene to prop up the currency as the 300-forint-per-euro level draws near and raise interest rates if the currency breaches that. The policy makers meet to discuss borrowing costs today and will announce their decision at 2 p.m. in Budapest.

They will probably leave the main rate at 5.25 percent, according to all 19 economists surveyed by Bloomberg. “The Hungarian government does not have a short-term funding problem, but things are likely to get messy anyway as the breakdown has sparked a sharp sell-off in the Hungarian markets, which in itself is highly destabilizing,” Copenhagen- based analysts at Danske Banka A/S wrote in a report today. “We would not rule out an aggressive rate hike of 300-400 basis points to curb the sell-off in the forint if the situation gets worse.”


What seems to be widely neglected for now is the contagion effect evident in the widening of CDS spreads of a number of other countries in the region. As we have pointed out before, the troubles with Greece's debt began to take a turn for the worse shortly after Dubai got into trouble over the debts of its insolvent property developers. There is no obvious connection between Dubai and Greece, and yet the contagion happened anyway, and pretty fast at that.

This is simply due to the fact that the groups of investors that are specializing in emerging markets debt and other riskier forms of debt are forced to sell positions unrelated to the immediate trouble spot if they are leveraged and get margin calls. In this way the problems of a small peripheral sovereign debtor can spread to places that are seemingly completely unrelated to it, except by dint of the fact that they are also potential trouble spots. Hungary's troubles have for instance been immediately transmitted to Ireland , which is rather baffling at first glance. 

So even if Hungary manages to plod on without the IMF's help, the contagion effect could lead to the market's focus shifting again to other debtors and a bigger crisis could be triggered simply due to this shift in focus – which is exactly how things proceeded in the case of Greece. Note here also that the euro area debtors under the EU's 'rescue fund umbrella' are by no means out of the woods.

The recent calming down of that particular saga may prove to be nothing but the 'eye of the hurricane'. We will soon publish an additional periphery watch report with charts showing the recent developments in the CDS of a range of potential flashpoints. As the example of Hungary shows once again, investors clearly need to keep a wary eye on the still evolving debt troubles of the euro area's periphery.



Hungary's prime minister Viktor Orban: 'No more austerity…don't you know, there's an election coming'

(Photo credit:




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2 Responses to “Periphery Watch: Hungary ditches Austerity”

  • Bearster:

    Pater, thanks for another great article!

    Now if only I had a clearer understanding of why the euro went up on this news… is it, as zerohedge claims, simply due to euro area banks and other debtors desperately trying to get their hands on euro to meet liquidity (i.e. margin calls) needs?

    • You must always keep in mind that different markets are not always moved by the same forces. Very large short positions have been built up against the euro at the recent height of the debt crisis, and it appears to me that there is still some short covering going on. Also, Hungary is not part of the euro area yet (although it says it would like to adopt the euro eventually). As a result the forint was weak against both euro and dollar. Meanwhile, the dollar-euro pair is presently primarily driven by a renewed focus on the weakening of US economic data, which has people speculating on more easing moves by the Fed.Only in case the troubles of the euro area periphery once again lead to a weakening of PIIGS debt will the market’s focus likely shift again – i.e. in case there is once again more widespread contagion. I should add here, the rise in Irish CDS was apparently motivated by a downgrade of Ireland’s debt by Moody’s that happened concurrently with Hungary stopping its negotiations with the IMF. This detail had escaped me, and the conclusion is that the move in Ireland’s CDS spreads was not a matter of contagion.

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