Hungary has an unhappy Monday
By David Keohane
Hungary has had a very bad Monday. Its equities plunged, its bond yields jumped, its currency moved towards dangerously weak levels and it was forced to scrap a planned debt sale because of low demand. And all this after a Friday in which Hungary’s headline Bux index gained 4.4 per cent in what analysts said was a “rally based on nothing”.
What changed? Well, the rating agency Fitch revised Hungary’s outlook to negative on Friday night, reminding investors of the real possibility the big three rating bodies could downgrade the country’s debt to junk in the very near future.
Fitch moved Hungary’s outlook to negative (it rates it at BBB minus) after markets closed on Friday. Monday morning was investors’ first chance to respond and they did so quickly: the Bux headline index had fallen 2.76 per cent by lunchtime (it closed down 2.83 per cent) and Hungary’s 10-year bond yields had jumped 20 basis points to 8.52 per cent. Of course, the small and illiquid nature of the markets involved mean large movements can be produced by relatively small trades.
A full rating downgrade is imminent. Soon after Fitch’s Friday night announcement, S&P also put the country on negative outlook. S&P also rates Hungary BBB minus.
Citi argued in a note on Monday that Hungary might have the reserves to cover debt maturities and its fiscal deficit until about mid-2012 but that “without the availability of market funding the government would have to turn to the International Monetary Fund or start quantitative easing at significant sizes by the second half of 2012.
“Based on the political rhetoric, we believe Hungarian assets would have to suffer sharper devaluation before the government changes its unwelcoming attitude towards the IMF.”
Hungary’s ratio of debt to gross domestic product is 80 per cent, up from 65 per cent in 2006. Its low domestic savings rate leaves it reliant on outside funding to cover what Citi estimates will be a nominal budget deficit (including interest payments) of about Ft800bn ($3.5bn), or 3 per cent of GDP, by the middle of next year.
The forint, meanwhile, continued to weaken against the euro, reaching Ft315.67. That is the level where Société Générale has warned of a “forceful response by the central bank, in the shape of an aggressive policy rate hike”.
Dangerous times indeed for a country that cannot blame its troubles entirely on the eurozone – domestic political considerations are just as worrying to investors – and where growth is anaemic. Fitch revised its 2012 real GDP growth forecast from 3.2 per cent to 0.5 per cent; the European Commission amended its from 2.6 per cent to 0.5 per cent.
Investors are going to be focused on the finalisation of the 2012 budget by late December as Hungary fights an increasingly futile battle against insolvency.
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