The Hungarian government’s erratic policies and populist rhetoric have come home to roost. Moody’s downgraded the country’s sovereign rating to ‘junk’ late yesterday, citing deteriorating growth prospects and a lack of clarity over how the government will rein in public debt. (See Moody’s press release.)
The other ratings agencies still place Hungary on the lowest rung of the investment grade ladder, but I expect that will soon change. The downgrade is no surprise. I’ve dedicated a fair number of posts over the past six months to describing Hungary’s economic and political problems. Some of the links are below:
- Hungary’s Latest Debt Relief Plan: From Bad to Worse
- Hungary’s Vicious Circle: Anemic Lending and Weak Growth
- Hungary: Finally on Investors’ Radar
- Hungary and Turkey: Political Parallels
- Fitch Raises Hungary’s Ratings Outlook: Odd Timing
- The Double Whammy: Debt and Demographics
- Is CEE Better Prepared This Time Around?
Hungary’s last-ditch request for IMF help was too little, too late. As I previously noted, the government publicly trumpeted its interest in a deal before notifying its own central bank – or even the IMF itself – which suggests it was merely a ruse to delay a ratings downgrade. (See my Weekly Mishmash: November 22)
Despite the downgrade, the government does not appear to be coming to its senses. Disturbingly, it seems more out-of-touch than ever based on the Economy Ministry’s latest statement:
“Since the decision by Moody’s has no realistic basis, the Hungarian government can only interpret this as being part of a financial attack against Hungary.” (reported by Zoltan Simon and Abdras Gergely of Bloomberg)
There’s no doubt that eurozone turbulence has compounded Hungary’s already serious economic woes, but the real culprit here is the government and its policies. From the effective nationalisation of private pension assets to its ill-conceived mortgage relief plan, the government has consistently shown disregard for the country’s long-term economic health and an unwillingness to take any responsibility.
According to Bloomberg, the yield on Hungary 10-year yields jumped over 9.5%. This rise in borrowing costs and the slide in the forint will accentuate the country’s economic woes. As one reader aptly commented a few weeks back, Hungary is ‘circling the drain.’ Its significant reserve cushion diminishes the threat of a near-term default. However, the government has large chunks of debt coming due next year (see figure below).
Source: Hungary Government Debt Management Agency (AKK)
Will the government swallow its pride and agree to a condition-laden standby agreement with the IMF? It may, but the country is in need of major structural reforms, and I don’t see the current Fidesz-led government having the political will to implement them.
Wow. You called this. Hungary is the class clown of Eastern Europe. I really really hope the banks have hedged out or marked this stuff down severely. The margin calls that seem to be cascading through the market now do not need to be magnified.
The debt maturity looks like the house of horrors for the next few years.
I am curious what policy responses do you expect this government to make over the short term.
Thanks for your comment, Dulan.
Good question on how much banks have provisioned. I don’t know the answer. If anyone does, please let us know. What I do know is that Austrian banks are particularly active in CEE, including Hungary. These include Erste, Bank Austria (subsidiary of Italy’s UniCredit), Raiffeisen.
Austria recently set limits on how much these banks can lend to their local CEE subsidiaries….ratio of new loans-to-deposits can’t exceed 110%. This won’t affect most CEE countries where current loan-to-deposit ratios are around 110% or below. But as the FT’s Beyond Brics notes, this will likely impact Hungary where the loan-to-deposit ratio is over 130%. Credit growth was already stagnant, and this will just add to Hungary’s woes.
As for the government, I think they will be forced to pursue an IMF agreement (unless they get really unconventional and manage to convince China to cough up external financing). They need financing from somewhere and are unlikely to continue tapping the market (given the economy’s weak fundamentals and eurozone turbulence). While the Fidesz government will have to agree to IMF conditions to get financing, whether they actually implement them and avoid clashes with the international lender is quite another matter.
I think what is porbably also going to hurt many of the “ordinary” people as well is the fact that they were sold a huge amount of loan products especially mortgages denominated in Swiss Franc (CHF). So while interest rates remain historically low in CHF terms assuming the majority of private households are unhedged for currency movements implies over the past two years they have lost around 50% on adverse currency movements. Not a nice situation at all!!!
Great point, Mark. Yes, Hungarian households are definitely hurting as a result of the currency weakening. Around 60% of total household debt is Swiss franc-denominated and many of these households are unhedged so, as you mention, these households have seen their debt burdens balloon in local currency terms. And, unfortunately, the government’s mortgage relief plan – which was passed earlier this year – really does nothing to help most of these debt-laden households.
Further weakening of the forint against the Swiss franc will only make things worse, which is why there’s talk about the central bank raising rates. Even though Hungary’s economy is likely headed for a recession, a rate rise is probably necessary to prevent capital outflows and give some support to the forint. Overall, not a good situation for Hungary.