Hungary and the euro zone blame game
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.”