A Hungarian default?
More on Hungary. It’s not hard to find a Hungary bear but few are more bearish than William Jackson at Capital Economics.
Jackson argues in a note today that Hungary will ultimately opt to default on its debt mountain as it has effectively exhausted all other mechanisms. Its economy has little prospect of strong growth and most of its debt is in foreign currencies so cannot be inflated away. Austerity is the other way out but Hungary’s population has been reeling from spending cuts since 2007, he says, and is unlikely to put up with more.
How did other highly indebted countries cope? (lets leave out Greece for now). Jackson takes the example of Indonesia and Thailand. Both countries opted for strict austerity after the 1997 Asian crisis and resolved the debt problem by running large current account surpluses. This worked because the Asian crisis was followed by a period of buoyant world growth, allowing these countries to boost exports. But Hungary’s key export markets are in the euro zone and are unlikely to recover anytime soon.
The other example is Argentina. It too recovered strongly from its 2001 crisis but its way out was default. Capital Economics writes:
There are arguments for why, in Hungary’s case, default might appear to be an attractive option. The economy runs both a current account surplus and a primary surplus (i.e. government spending is lower than receipts before interest payments are taken into account). This means that if the Hungarian government were to default and were to be barred from borrowing from abroad, it would still not be forced into drastic fiscal austerity or a painful current account adjustment via reduced domestic demand.
Moreover, the note says:
Since a large proportion of debt is held by foreign investors, the domestic economy would be relatively unaffected.
The note argues in fact that “back door default” has already occurred as banks, most of which have foreign parents, have been forced to absorb losses from the government plan to reduce the euro- and Swiss franc mortgage debt held by households.
So when could default come?
For now, Budapest is sticking with austerity and is pursuing an IMF aid deal. In fact it has just announced a tentative plan to sell bonds on global markets (see my earlier blog here). Jackson does not see a default as inevitable. But he reckons the proposition will become increasingly attractive as 2014 elections approach and voters, sick of austerity, will look to back candidates bearing alternative solutions.