Saturday, 12 November 2011

What about the other perypheral EU countries: Hungary

With most of the investor focus nowadays on the PIIGS "fallen angels", and  on the forthcoming US presidential campaign, not much has been heard about some of the other EU countries: Hungary, Romania, Slovakia, Bulgaria. Rumors in the market are that banks there are slowly withdrawing capital and scaling out of their less profitable businesses, but is there any cause of concern regarding their financial stability ? How did they surf the crisis wave and do they still require a safeguard ? Are they going to be left out of the core-Europe, in case such plan materializes or not ?


Hungary has been hit very hard by the financial crisis and most of the economic sectors have suffered major losses, especially the real estate and banking sector. Hungarian sovereign credit grade may be pushed to junk status after Fitch decided to change its outlook from stable to negative and thus joined the other two rating agencies: Moody's and S&P. If Hungary loses its investment grade status (currently at BBB- according to Standard and Poor's rating agency) it will find it increasingly difficult to fund its sovereign debt.

What this means for ordinary people is a higher interest rate for mortgage and consumer credits and possibly a lower Hungarian Forint against the Euro and the Swiss Franc. And the Forint is on a depreciating path against the dollar, as shown in some of my previous posts.The HUF is testing its most recent support level at 225.60 and if it bounces out of this level, it is going to no-man's-land.

More from Fitch Ratings:

Hungary is particularly exposed to any deterioration in the economic and financial conditions in the eurozone, owing to its open economy, mainly Western European-owned banking sector, relatively high levels of public and external debt and financing ratios, sizeable stock of portfolio investment (including a 40% non-resident share of domestically issued government debt) and Swiss Franc (CHF) mortgages debt.
Heightened risk aversion has increased refinancing risks on external sovereign maturities. Hungary needs to refinance around EUR 4.6 bn in 2012, and EUR 5.0-5.6 bn annually in 2013-14, of foreign exchange denominated debt. Any potential selling of HUF-denominated debt by non-resident investors could add to financing pressures. The government's EUR 1.6 bn cash deposit at the central bank provides a moderate buffer against refinancing risks.
And about Forint's outlook and its connection to the Swiss Franc (now effectively pegged to Euro):
 Over the course of 2011 the Hungarian forint (HUF) has depreciated by 13%-14% against both the euro and the CHF, thus increasing further heavy public- and private-sector debt repayment burdens. The government's policies to tackle the large stock of CHF-denominated household debt (equivalent to 16% of GDP in mid-2011) may turn out to be fairly ineffective and have negative consequences. Credit constraints and a lack of sufficient savings will likely prevent the share of CHF loans that are repaid early at a preferential exchange rate from rising above 20%-25% of the total.
 The Hungarian Central bank will first have to tackle the pressure on HUF and keep a stable exchange rate band, in order to be able to start planning about economic stimulus.

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