Global Investing

Hungary says it might borrow money from global bond markets before it lands a long-awaited aid deal with the International Monetary Fund. That pretty much seems to suggest Budapest has given up hope of getting the IMF cash any time soon. Given the fund has already said it won’t visit Hungary in April, that view would seem correct.

There is some logic to the plan.

Hungary desperately needs the cash — it must  find over 4 billion euros just to repay external debt this year.

It is also an attractive time to sell debt.  Appetite for emerging market debt remains strong. Emerging bond yield premiums over U.S. Treasuries have contracted sharply this year and stand near seven-month lows. Moreover, U.S. Treasury yields may rise, potentially making debt issuance more costly in coming months.

For Hungary’s government , the idea of a successful bond sale is particularly attractive as this will at a stroke  improve its bargaining position with the IMF. That’s bad news, says Tim Ash, RBS head of emerging European research:

The problem is that getting cash in the bank may actually reduce the likelihood of the government actually finally cutting a deal with the IMF, so arguably increases market risk over the slightly longer term.

Some bets are not for the faint-hearted. Risky punts are even less so following a sovereign debt crisis, one that has riddled European debt markets for two years. Barclays Capital, however, recommends a particularly unusual bet, one that your parents might baulk at.

It will be of little surprise that Barcap is bullish on the year, advising towards assets that will perform well in an environment of US-led global growth, easy monetary policy and tight oil supplies following reduced tail-risks in Europe curbed by cheap money from the European Central Bank.

Now that the rush of the addictive LTRO money is over and the dust is settling on central banks’ balance sheets, Barcap is brave enough to recommend an unlikely candidate and one of the recent targets of financial markets — Portugal.

Japan has not been a sexy destination for investment. In an environment of rising sovereign risk, Japan’s huge debt burden (+200% and rising) and lack of triple-A rating (Japan is rated AA-, Aa3 and AA by the main rating agencies) are not something that would attract the world’s investors, including the powerful central bank reserve managers.

However, the yen is a different story. Enjoying a safe-haven status, the Japanese currency is staying just below its all-time high around 75.90 per dollar, while it also rose to an 11-year peak against the euro in January.

JP Morgan,whose asset management arm manages $70 billion for 65 official sector clients including central banks and sovereign wealth funds, says reserve managers have been diversifying into non-G4 currencies but the strategy has not performed well.

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O’Neill. O’Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China’s economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy’s economy was surpassed in size last year by Brazil, another of the BRICs, O’Neill counters, adding:

“How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy.”

Emerging economies are cooling now after years of turbo-charged growth. But according to O’Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.

On a recent trip home to Singapore, I was startled to learn just how much housing prices in the city-state have risen in my absence.

A cousin said he had recently paid over S$600,000 — about US$465,000 — for a yet-to-be-built 99-year-lease flat. Such numbers are hardly out of place in any major metropolis but this was for a state-subsidised three-bedroom apartment.

Soaring housing prices have fueled popular discontent — little wonder as median monthly household incomes have stagnated at around S$5,000.

“Will no one rid me of this turbulent central banker?”  Hungarian Prime Minister Viktor Orban may not have voiced this sentiment but since he took power last year he is likely to have thought it more than once.  Increasingly, the spat between Orban’s government and central bank governor Andras Simor brings to memory the quarrel England’s Henry II had with his Archbishop of Canterbury, Thomas Becket, over the rights and privileges of the Church almost 900 years ago. Simor stands accused of undermining economic growth by holding interest rates too high and resisting government demands for monetary stimulus.  The government’s efforts to sideline Simor are viewed as infringing on the central bank’s independence.

So far, attacks on Simor have ranged from alleging he has undisclosed overseas income to stripping him of his power to appoint some central bank board members. But  the government’s latest plan could be the last straw – proposed legislation that would effectively demote Simor or at least seriously dilute his influence. Simor says the government is trying to engineer a total takeover at the central bank.  “The new law brings the final elimination of the central bank’s independence dangerously close,” he said last week.  
 
The move is ill-timed however, coming exactly at a time when Hungary is trying to persuade the IMF and the European Union to give it billions of euros in aid. The lenders have expressed concern about the law and declined to proceed with the loan talks.  But the government says it will not bow to external pressure and plans to put the law to vote on Friday. That has sparked general indignation – Societe Generale analyst Benoit Anne calls the spat extremely damaging to investor confidence in Hungary. “I just hope the IMF will not let this go,” he writes.

Central banks and governments often fail to see eye to eye. But in Hungary, the government’s attacks on Simor, a respected figure in central banking and investment circles,  is hastening the downfall of the already fragile economy. For one, if IMF funds fail to come through, Hungary will need to find 4.7 billion euros next year just to repay maturing hard currency debt. That could be tough at a time when lots of borrowers — developed and emerging — will be competing for scarce funds.  Central European governments alone will be looking to raise 16 billion euros on bond markets, data from ING shows. So Orban will have to tone down his rhetoric if he is to avoid plunging his country into financial disaster.

Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.

Warsaw wants to double next year’s dividends from stakes in firms ranging from copper mines to utility providers to banks.

Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed “the forgotten side of the government balance sheet”. It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm’s length from the state and run along strict corporate standards to consistently grow profits.

No longer an idle “what if” game, investors are actively debating the chance of a breakup of the euro as a creditor strike  in the zone’s largest government bond market sends  Italian debt yields into the stratosphere — or at least beyond the circa 7% levels where government funding is seen as sustainable over time.  Emergency funding for Italy, along the lines of bailouts for Greece, Ireland and Portugal over the past two years, may now be needed but no one’s sure there’s enough money available — in large part due to Germany’s refusal to contemplate either a bigger bailout fund or open-ended debt purchases from the European Central Bank as a lender of last resort.

So, if Germany doesn’t move significantly on any of those issues (or at least not without protracted, soul-searching domestic debates and/or tortuous EU Treaty changes), creditor strikes can reasonably be expected to spread elsewhere in the zone until some clarity is restored. The fog surrounding the functioning and makeup of the EFSF rescue fund and now Italian and Greek elections early next year  — not to mention the precise role of the ECB in all this going forward — just thickens. Why invest/lend to these countries now with all those imponderables.

Where it all pans out is now anyone’s guess, but an eventual collapse of the single currency can’t be ruled out now as at least one possible if not likely outcome. The global consequences, according to many economists, are almost incalculable. HSBC, for example, said in September that a euro break-up would lead to a shocking global depression.

Do capital controls work?  After years of telling us that they do not, the IMF and World Bank reluctantly conceded last year they may not be all that bad and indeed in some cases they may actually help keep away some of the speculators who have in recent years been pouring into emerging markets.

Developing countries for the most part like foreign capital, indeed they rely on it for development. What they don’t like is hot money — short-term speculative flows which are widely blamed for causing past emerging market crises. So starting from October last year several of them slapped controls on some of this cash. There are signs these may be working.

Take the experience of two large emerging markets, Brazil and Indonesia. Brazil shocked foreign investors last October with a 2 percent tax on all flows to stocks and bonds. Nine months on, investors are still putting their cash there and Brazil has raked in millions of dollars thanks to the tax. But many fund managers, like HSBC’s Jose Cuervo, who runs a $6 billion portfolio of Brazilian stocks, are buying American Depositary Receipts (ADRS) of Brazilian firms rather than stocks listed in Sao Paulo.  Because ADRs are in dollars and listed in New York, investors are getting exposure to Brazil but sidestepping the tax.  Brazilian firms continue to receive investment but Brazil’s currency is not appreciating  like it was last year. A win-win all around.

It suffered the collapse of its currency, economy and banking system so being invoked in a version of the notorious Nigerian email scam is one of the smaller humiliations endured by Iceland.

The confidence trick, which has roots in the 18th century, usually involves an email from someone claiming to be either a deposed African dictator or a Nigerian lawyer, promising a sum of money in return for help to access a substantial fortune.

But the latest spam email making its rounds purports to be from Iceland, one of the highest profile sovereign casualties of the global financial crisis. This version of the email is supposedly from a "devoted christian (sic)" from Iceland", a widow seeking help to access $6 million in a Canadian bank left to her by her husband who worked for an oil giant for 19 years.