When Hungary recently …

… told the IMF/EU tag team to basically go home and take its austerity plan and use it for kindling (until after local elections, anyway), a mini-panic swept across a number of markets in the Eastern European and Balkan periphery of the EU, as you can see in the chart of indexed 5 year CDS spreads below:

CDS on Hungary, Bulgaria, Romania and Croatia, indexed to 100 at the starting  date in January (if you want to know the actual spread, use the divisors provided in the chart legend. For instance, Romania would then be 161.33/0.428 = 377 basis points) – click chart for higher resolution.


What makes these developments really interesting is how they have evolved in terms of their timing. Note how the early May outbreak of trouble in Greece led  to an initial spike higher in the periphery spreads, followed by a reduction in spreads once the EU rescue  fund was put into place. Then, when the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) re-tested the highs in CDS spreads set in May later in June, the peripheral countries – which are outside of the EU's bailout umbrella – saw their CDS spreads spike to much higher highs. All of them have recently built a triangle that reminds us a bit of the triangle in the SovX (the Markit Index of Western European Sovereign CDS), although the Eastern European one happens to be at a much higher average level of course. Another difference is that the recent news from Hungary threaten to lead to a break-out move (the break-out evidently hasn't happened yet, but it's a promising chart in that respect).

Today, Hungary had a problem selling debt, and the same happened to Romania.

The FT reports 'IMF stand-off hits Hungary debt sale':

“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.”

However, there are some signs that Hungary may not be in as bad a situation as this debt auction implies. Several analysts quoted in the FT point out that the overall debt picture is not unduly alarming:

“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.”

Given that Hungary has already drawn $14 billion from the IMF/EU/World Bank combined funding facility, it has fairly strong foreign exchange reserves as well. Moreover, what is currently working in its favor (and in the favor of numerous other debtors under scrutiny) is a likely brief upturn in social mood following the recent short term low in global stock markets. In fact, the message from the markets is currently mixed, which may create some breathing space.

In the meantime, Romania has also run into a problem when trying to auction government debt. It has recently hiked its VAT (value added tax) to an onerous 24%, and now the nation is on 'inflation watch'. Apparently this was reason enough to 'set up a committee'.

As Reuters reports:

“Romania Economy Minister Adriean Videanu holds news conference on setting up a body to monitor price rises after a 5 percentage points hike in value added tax to 24 percent.”

We have a hint for the Economy Minister – apart from the great idea and  recommendation for 'ministers of economics' everywhere courtesy of Ludwig von Mises –  who was once asked what the first thing he'd do would be if he were appointed minister of economics. His curt and to the point reply was: 'Resign.' Our hint is this: prices will probably rise. You probably won't need an 'appointed body' to notice.

Then Reuters informs us:

Romania sold barely a fifth of the one-year debt it had planned to on Monday, capping bids at a self-imposed top yield of 7 percent to extend a policy that analysts say could lead to sharply higher rates later this year.”

Ah…price controls, or in this case, yield controls! So that is what the minster of economics is presumably for – coming up with whacky ideas. We can state that all is not likely to be well with Romania if it tries to 'cap yields'. Assuming the government wants to continue to spend money and not default, the choices really are 'either let yields go where they want to go'  or 'print money'. The former may be more difficult in the short term, but the latter will surely be far more devastating in the long run. In the meantime, the Romanian Central Bank has been cutting rates for quite some time in an effort to spur lending – only, it was unable to actually bring market rates down.

“Compared with the beginning of May, the three and six month ROBOR [Romanian interbank lending rate] rates used as reference for RON [Romanian New Leu] lending went up by more than one percent in June, reaching 7 – 7.5% a year and stayed there in the first half of July, as well, when many banks update the cost of loans tied to the monetary market indices. Anyway, some banks only update the reference every six months. BCR, the biggest lender by assets, used the 10.65% ROBOR three-month index published by the National Bank of Romania (NBR) on December 31, 2009 in June. Others have already increased interest rates on RON loans in June.”

Romania's official central bank lending rate has been going down dramatically, but market rates have refused to follow it lower and instead have begun to rise – click chart for higher resolution.

Bulgaria meanwhile is a potential problem for Austria (as is Hungary, the Ukraine, Croatia, and numerous other former Eastern Bloc countries) – this is because Austrian banks have lent out a lot of money there. As a result, Austria is trying to help Bulgaria to become a member of the EU's Schengen agreement, as well as wangling 'development funds' from the EU, as we learn here:

“Bulgaria and Austria along with another 100 regions in Europe will insist on new regulations on the distribution of the EU funds for rural development, stated Bulgaria’s PM Borisov after his meeting with Lower Austria’s PM Erwin Pröll Monday evening. Lower Austria has an office in Brussels and consults tens of regions over EU projects. “We have invited Bulgaria for a common line with other EU member states and we shall work out a memorandum on the new regulations which we shall submit to Jose Barroso on October 7,” Mr. Pröll stated.”

Furthermore, Austria is suddenly championing Bulgaria's cause in all sorts of matters, which proves indirectly that a lot of money must be at stake:

“Bulgaria has achieved much in fighting corruption and organized crime over the past year, according to Austrian Chancellor Werner Faymann. Faymann welcomed Tuesday in Vienna the Bulgarian Prime Minister Boyko Borisov and a Bulgarian government delegation.” […] “Borisov and Faymann have agreed that the EU funds for regional development should not be reduced in the 2013-2020 financial framework of the EU.”

Well, you sure don't want a big debtor to run out of other people's money, that much is certain. We have previously mentioned Mr. Faymann, the Austrian chancellor, in the context of his ardent support for a 'transaction tax' (on securities trading) and similar populist ideas from the teutonic brain trust. Faymann is a socialist ('social democrat', i.e. half-hearted socialist), who as we noted is the Austrian political scene's premier gift to stand-up comedians across the country. We wouldn't want to keep this photo from you which shows Werner the worried creditor spokesman and Boyko the crime fighter , harmoniously united in their common desire to get some moolah from the EU:

To the left, Boyko Borisov, the terror of Bulgarian organized crime and to the right Werner Faymann, who has given political cabaret in his homeland a big shot in the arm.

(Photo source: unknown)

As to Croatia, there is a recent informative blog by Edward Hugh in the wake of the country's negotiations to enter the EU going into the final round. Fittingly entitled 'Croatia, on the brink of what?' , it shows that the country has a number of economic challenges to overcome, not the least of which is its indebtedness.

“As a result of the combined impact of the difficult external conditions that prevailed and the ending of the domestic credit boom, Croatia's GDP fell by some 5.8% in 2009, following a number of years of strong (if not sustainable) growth. Even though in the first three months of this year there were been some tentative signs of recovery, the economy was still down by 2.5% on an annual basis.”“


Given the high level of external indebtedness of the Croatian economy (net external debt is currently running at around 95% of GDP) and the sensitivity of the financial markets to fiscal deficits, there is likely to be little in the way of a revival in domestic demand, depending as it does on the availability of credit.”

Not surprisingly, Austria's banks are major lenders in Croatia as well, which  makes Austria, this former member of the EU's 'hard currency core' (Austria's own currency, the Schilling, was for many years tied to the German Mark in a very tight trading band), a potential future flashpoint no-one is thinking much about yet. Consider yourself herewith forewarned. We would keep a wary eye on Austria's sovereign debt and CDS spreads as well (currently still low, but tending to rise in sympathy with those of Eastern European neighbors).

Lastly we leave you with one more chart of (indexed to 100 as well) CDS of a few other nations we like to keep an eye on, just in case:

CDS on Dubai's and Slovenia's debt (Slovenia borders Austria to the South) are worsening relative to the beginning of the year, while Lithuania's and the Ukraine's are getting somewhat better. The Ukraine is about to get more IMF help, and there seem to be no hints that anything will stand in the way of the planned disbursement. As we noted previously, its capital Kiev has some problems debt-wise, but the country as a whole seems to be getting a better grip on its debt problems. Austria's banks will be happy to hear it – they are among the Ukraine's biggest lenders too. Note however that the absolute level of CDS spreads on Ukraine's debt remains nonetheless extremely high at 553 basis points (see the low divisor for the Ukraine indicated in the chart legend – Slovenia's CDS are the ones that have performed the worst this year in relative terms, but are the lowest in absolute terms among the four countries on the chart). The Ukraine remains number four on the 'top ten list of the riskiest sovereign debtors', after such luminaries as Venezuela, Greece and Argentina. Dubai currently ranks 7th on that list at 486 basis points – click chart for higher resolution.


As the FT notes, Greece has actually been able to sell some short term debt at not too onerous rates:

“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.” […] “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.”

Ever since we noticed that Spain's debt auctions seemed to go surprisingly well right after Spain's banks borrowed unprecedented amounts from the ECB, we are slightly suspicious of such sudden breakouts of debt sales harmony. Not surprisingly we now see 'smooth debt auctions in Greece' under roughly similar circumstances.

According to Reuters:

“Lending to euro area credit institutions related to monetary policy operations, which reflects ECB lending to Greek banks, stood at 93.8 billion euros ($121.7 billion) compared to 89.4 billion at the end of May, the Bank of Greece (BOGr.AT) said in its monthly financial statement published on its website. Greek banks have lost wholesale market access in the wake of the country's debt crisis, becoming increasingly reliant on the ECB to fund their operations. ECB funding stood at 49.7 billion euros at the beginning of the year.”

Well, yes, Greek banks have not only lost their access to the interbank funding market, but have also lost a lot of deposits, which worried Greek citizens have shifted elsewhere to be on the safe side (and who can blame them?). Still – who is actually bidding for Greek sovereign debt at those auctions? Probably mostly the Greek banks themselves actually – which are already very large holders of Greek government debt. Of course this paper can then be re-discounted at the ECB for more short term funding. A neat trick –  in this case employed to 'buy time' (a.k.a. 'pretend and extend'). In addition it should be mentioned that  given the short maturity of the bills some investors may well deem them a relatively 'safe' way to pick up juicy yields denominated in euro. After all, the EU bail-out for the moment ensures that no Greek debt restructuring is imminent.



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