Opinion

Felix Salmon

Good news from Hungary

Felix Salmon
Jul 19, 2010 14:12 UTC

Remember the storm-in-a-teacup Hungary crisis, back in June? Global markets all tumbled on fears about Hungarian austerity, of all things. It was all a bit weird for two reasons: firstly, the crisis was caused by remarks from a brand-new and wholly inexperienced incoming government, which had yet to find its legs or implement any policies at all. And secondly, Hungary is not a part of the eurozone, so there was no chance of a broader euro crisis resulting from what went on there: in the worst case scenario, the forint would simply weaken. The obvious conclusion was that markets were just looking for any excuse to plunge.

Today, Hungary blew up all over again, the forint fell by more than 2%, and debt spreads widened out to their early-June levels, as austerity talks with the IMF fell apart. This was, on its face, a more credible crisis: it was caused by a real failure rather than just talk. But markets outside Hungary didn’t seem to notice, and neither the forint nor Hungarian spreads have yet found themselves at noticeably worse levels than they saw in June.

In June, I described the Hungary crisis as “just another one of those random triggers which might normally have been easily ignored, but which was simply the excuse that jittery and volatile markets needed to sell off sharply”. So I’m not surprised that markets were sanguine today: lightning rarely strikes twice in the same spot.

I wonder how people are feeling at the IMF today. Gordon Fairclough reports that “one way the IMF can encourage compliance is to suspend talks with borrowers and allow a punishing market reaction” — but it seems that Hungary can easily weather this particular punishment, so long as it doesn’t get any worse.

So all of this is good news, I think: global markets are less prone to panic, and even Hungarian markets seem to have made peace with the idea that there might not be an IMF backstop for the time being. Maybe the “new normal” is, slowly, becoming normal.

COMMENT

A very balanced piece – and probably right. But beware the Party now in power…they are populists of the worst kind. It was a smart(ish) move of the IMF to fire a shot across their bows…I sense they figured a battle now might obviate a war later.

I do note, however, that the IMF sent a not entirely coded message to the G20 over the weekend, the gist of which was ‘we need more money if we’re gonna get through this minefield’.

Tell me, is it me – or is a deadly combination of greed, stupidity, speed and complexity now making investment analysis something of a mug’s game? This might apply….

http://nbyslog.blogspot.com/2010/07/inve stment-object-lesson-in-why-small.html

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Hungary: The Hungarian view

Felix Salmon
Jun 7, 2010 13:38 UTC

Was the Hungary-related market swoon on Friday the result of misguided naivete on the part of investors who really have no idea how to parse statements from Hungarian politicians? Erik D’Amato, in Budapest, certainly thinks so:

In what must be one of the craziest episodes I’ve witnessed in almost 20 years covering financial markets, a global mini-meltdown has been triggered or at least stoked by people listening to – and taking seriously – the ramblings of a few Hungarian politicians…

Asia was still down earlier today, with Hungary cited as a major reason for the selling.

And all because people foolishly assumed that some Hungarian politicians might be telling the truth! …

In this case there was certainly never any reason to believe that what was being said was believed even by the people saying it.

The point here is that the incoming government ran on a platform of fiscal easing: that’s usually a good way of getting elected. And so in order to make the fiscal cuts necessary to remain compliant with EU and IMF conditionality, they had to get very serious very quickly — in public — about the severity of the government’s financial problems.

New to government, they went too far. But there’s a case to be made that the markets should have taken the government’s remarks as good news, since they indicated that everything was going according to plan and that the government was just as serious about fiscal austerity as anybody could hope, and was trying to use scare tactics to sell the need for budget cuts to the populace more generally.

European markets aren’t buying it: they’re trading below their Friday closing levels today, as is the euro. But then again, the whole idea that global markets suddenly cared about Hungary on Friday was always a bit bizarre. They never cared much about Hungary before, and the country isn’t a member of the eurozone, so doesn’t pose the existential risks to the European project that Greece does. Most likely this was just another one of those random triggers which might normally have been easily ignored, but which was simply the excuse that jittery and volatile markets needed to sell off sharply.

These little news bombs can and will come from anywhere: by their nature they’re unpredictable. What’s clear is that markets aren’t robust to them these days. Which raises the question: do you want to “invest” in an asset class which is so prone to panic?

COMMENT

“Clearly, if the American public wants to hedge its misfortune, it should own American stocks.”

I don’t see this happening anytime soon with near weekly stock market crashes. If the large fund managers showed some backbone and stopped panic selling every time a European minister sneezes, the US stock market might recover. But all I see in the markets for the foreseeable future is fear and cowardice.

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