Hungary and the euro zone blame game

November 17, 2011

More tough talk from Hungarian officials on the ‘unjustified’ weakness of the country’s currency, which has dropped 11 percent against the euro this year to all-time lows.

This time, it’s central banker Ferenc Gerhardt arguing that the weakness of the forint is out of sync with economic fundamentals and blaming it on the debt turmoil in the euro zone.

Perhaps he should look a little closer to home.

Hungary’s drift from orthodox economic policy since the centre-right government took over the reins last year has made it the most exposed of eastern European economies.

The ruling party Fidesz swept into power  promising to create a new social contract that would subject the economic system to the “popular democratic will”. Ironically, the policies of Prime Minister Viktor Orban have made Hungarian markets more sensitive to the global sentiment than ever.

Domestic investor participation in local bonds and stock markets has fallen since the government controversially seized private pension fund assets to boost state coffers this year.

Average daily trading volumes on the Budapest stock exchange have slipped 25 percent this year while non-resident ownership of local-currency bonds are at elevated levels — as high as 40 percent — and estimated to be worth a considerable 4.8 trillion forints ($20 billion)

No surprise then that investors are so preoccupied with the threat of a rating downgrade to ‘junk’ status . If that happens, many “real money” institutional foreign funds will have to liquidate their Hungarian bonds.

Never mind that Hungary has to refinance close to 5 billion euros in foreign currency debt next year. Even recent efforts by the sovereign to sell local-currency debt have stumbled. Despite paying more to borrow, the government has had to cancel some debt auctions and cut back on funding targets.

Still, Hungarian decision-makers may in fact be more aware of the impact of domestic policy than their recent statements blaming the euro zone crisis suggest.

“We have to live with the fact that…our crisis management policy, which we believe firmly is a successful one, is a combination…of conservative orthodox and non-orthodox elements. Sometimes rating agencies and journalists don’t like it because it’s simply new,” he told an audience at the London School of Economics last week.

“To criticise rating agencies and journalists and economists is not good policy so we have to live with their opinion.”

 

5 comments

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And they want to adopt the Euro currency. Not in our lifetime or even the next. I have a home in Hungary and the country is beautiful and the people are great but they will never ascend to the industrial level to support the Euro currency. Just the way it is there.

Posted by Intriped | Report as abusive

‘Twas not so long ago that we heard on this far side of the pond that Budapest was a safe investment, in the hands of good conservatives.

Posted by ChrisHerz | Report as abusive

Thanks Sebastian, this was an interesting and timely analysis.

It will be interesting to see the European Commission’s reaction to the complaint over Orban’s plan to allow debtors to repay their swiss franc loans at fixed rates.

Posted by scythe | Report as abusive

IWAKI, Japan – Billionaire investor Warren Buffett says Europe’s debt crisis has shown up a “major flaw” in the 17-member euro zone system and it will take more than words to fix it.

BTW, THE Euro will sink along with the Forint baby!We will see history being made as the Euro will come down to earth because most Euro nations WILL BE on the IMF chow line.

Posted by Intriped | Report as abusive

@ Intriped

Buffet said to CNBC that he was looking to buy up equity of large eurozone companies if the price was cheap enough.

The bearish eurozone headline splatter is the usual market fodder directed towards softening those prices.

Wouldn’t get too excited unless you are a shareholder.

Posted by scythe | Report as abusive