EM vs DM: Emerging Markets yesterday kissed their lows again the SPX going back through the crisis, even including a spike down when EM “bottomed” first in the Fall of 2008.
The Emerging Money EM FX Basket (EMFXB) is a GDP weighted index comprised of the eight most volatile primary currencies in EM.
As the shadow of sovereign credit contagion passes back over Hungary, banks that do a lot of business in the country are weighing their exposure to another cycle of downgrade and possible default.
Having roiled the markets with new fears of a European debt default, Hungary now needs to be more forthcoming with investors about how it plans to avoid becoming the next Greece.
Global and regional banks alike have called for more clarity on a new Hungarian budget that may not be able to keep the country from defaulting on its IMF obligations. Simply announcing a tougher banking tax and vague budget cuts is not enough, warn local analysts at Budapest Investment Management.
Hungary is not part of the euro zone, but high-profile fretting from members of the incoming Fidesz government has not boosted confidence in the health of the euro periphery — countries like Hungary, Poland and Romania — or the European banks that hold these countries’ bonds.
So far, Fidesz says it will levy an $845 million banking tax and cut $507 million from government salaries and public spending projects.
Income tax reform is also on the table, but this is raising eyebrows from analysts who wonder if all of this is simply an excuse to get tax cuts past the IMF.
The forint is back on the defensive:
The forint is doing a bit better today as traders digest news that Hungarian officials are preparing a stricter budget in order to avoid the prospect of a Greece-style debt default.
The new Fidesz government warned last week that the previous administration’s budget contained errors that could force Hungary to default on its IMF and World Bank obligations.
The country was forced to accept emergency loans in 2008 and before last week had been considered relatively safe from further embarrassments.
Although a new budget could emerge as early as Tuesday, traders remain cautious until it becomes clear exactly how the old numbers were incorrect and how the new government will repair the situation.
Among Hungarian stocks traded in the United States, leading regional phone carrier Magyar Telecom (MTA) is up today:
However, oil and gas company MOL (MGYOY), which is much more heavily exposed to foreign markets and currency rates, is extending its decline:
The forint is a negligible component of currency ETFs. Likewise, Hungarian stocks represent at best 4% to 5% of Central Europe stock ETFs like GUR or ESR. For U.S. investors, the real story here is that trouble in Hungary could spill over into trouble for the region and, ultimately, Europe.
The dollar index (DXY) is flat today:
Hungary continues to roil the currency markets as traders confront hints that Europe will devalue its way out of the sovereign debt problems that started in Greece.
Big brokerage firms are still digesting developments in Budapest, where members of the incoming Fidesz government are now promising a full audit of the country’s finances over the weekend.
Officials say the previous administration cooked the numbers to make it look like Hungary was actually complying with IMF budget requirements. So far, nobody knows how far the statistics diverged from reality, but members of the Fidesz party are apparently very worried that they are in a “grave” situation of becoming the next Greece.
Hungarian credit default swaps, which measure the cost of insuring the country’s bonds, have blown out. Nobody is buying. Everyone is selling.
Money is moving back to the Swiss franc, which still enjoys a well-earned reputation as a regional reserve currency. At this rate, it looks like another month or two of downward action for the euro.
DXY is up again:
In fact, European Union officials may have finally realized that a weaker euro may not be a problem.
French prime minister Francois Fillon shocked markets overnight by saying, “I only see good news in parity between euro and dollar.” This is a huge thing to say if you are committed to supporting currency stability or fighting inflation. Instead, it signals that at least in France, a 15% to 20% devaluation of the euro is gaining momentum as a possible solution to Europe’s problems, and not the problem in itself.
Local reports that Hungary may be in a worse economic position than investors previously suspected are leaving the forint under pressure and raising the flag of Greek “contagion.”
The Hungarian central bank says the government’s operating deficit should run at 4.5% of GDP even if the country dips into its reserves to pay debt. Previous forecasts had the government running a 3.8% deficit, in line with the terms the IMF, World Bank and European Union set when they bailed Hungary out in 2008.
After hearing the news, Lajos Kosa, deputy chairman of the country’s incoming Fidesz government, reportedly told the local press that Hungary now has only a “slim” chance of avoiding becoming the next Greece.
Needless to say, this is not what the markets need right now. Hungary is a disappointment because many investors thought the country had taken its tough medicine two years ago. If its previously announced numbers are now being revised, what other surprises are out there?
And do we now call the troubled countries of Europe the “PHIIGS”? EU officials are already demanding that Hungary redouble its fiscal discipline in order to meet the old debt target.
In any event, the Fidesz party has not been getting along with the central bank, so there may be political maneuvering going on here. Whether the government bows to the pressure to announce new austerity measures (possibly as early as this weekend) or the infighting continues, the effects on the euro should be interesting.
Hungary is a member of the European Union but not a member of the euro zone. This means that, unlike Greece, the country could theoretically default on its debt or devalue the forint in order to regain its footing. Neither is an attractive option, but there may be a lot of talk about either or both in the next few months.
The forint (HUF) is down 2% against the dollar:
News that a London-based macro forecaster has fingered Hungary as the country most likely to follow in Greece’s footsteps is making the rounds, but so far investors aren’t running for the exits.
The central bank in Hungary cut its key interest rate by 50 basis points to 7 percent Monday, the lowest level since July 2006.
How far have we come from the depths of the crisis? There is no better example than the CEE3 (Czech Republic, Poland and Hungary) where attacks on the currencies and banks have abated, and investors actually see markets that offer opportunity and have lagged global emerging markets this summer.
Hungary’s currency, the forint (HUF), was as high as 252/$ in the worst of crisis and now trades in at 178/$.
Rates are now down at 7 percent, compared with a peak of 11.5 percent last year, but they have further to go. Some expect 6 percent by year-end and 5 percent in the first quarter of 2010.