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Friday, October 10, 2008

The Hungarian Economy Caught In The Scissors

Hungary's forint fell almost 3 percent to two-year lows at 272 versus the euro early onFriday morning as a fresh wave of risk aversion triggered a sell-off across the emerging markets. There were extremely large fluctuations in EUR/HUF quotes even before the opening of the Hungarian interbank market, where the bulk of trade takes place. Initially the HUF was being quoted at around 267 to the EUR, from where it bounced back almost instantaneously to 263 and then shortly after eight o'clock CET it slumped to a two-year low of 272 in a matter of minutes, by nearly nine o'clock it was back around 261.5 and since that time it has been steadily loosing ground again. At 11:30 CET it stands around 263.

The Hungarian authorities did not lose much time wading in to verbally defend the currency with both the finance minister and the head of the central bank making strong public statements.

The main market benchmark - the BUX - plunged over 9 percent to hit levels last seen in Dec. 2004. Liquidity in bond markets remained low and trade was nearly non existent, traders said.

Central bank governor Andras Simor said the bank was ready to intervene if needed to relieve markets but was not planning to step into the bond market.

"This is an extraordinary situation and in extraordinary situations we don't rule out anything and we don't promise anything," Simor reporters on the
sidelines of a joint news conference with the finance minister. "Our primary tool is the interest rate but monetary policy has a wide array of tools," he said, adding that the bank did not need to react to daily exchange rate movements and the bank planned no intervention on the bond market.

The central bank will offer daily currency swap tenders from Monday to boost liquidity, Simor said. The government has scrapped a limit on bond holdings for pension funds and offered to guarantee interbank loans. Finance Minister Janos Veres said the government "are ready to use all means necessary to intervene to stabilise markets,".

"I would rather not discuss the potential tools (for marke intervention). Throughout Europe, governments have used extraordinary tools I'm would not rule out anything and I will not promise anything," he said.

In addition the OTP bank situation seems to have deteriorated, with shares falling 14 percent in the final 30 minutes of trading yesterday, erasing an earlier gain of as much as 9.7 percent. Hungary's government this morning denied reports that it was buying a stake in OTP to prop the bank up. The stock was down 7.9 percent to 3,550 forint at 10:27 a.m. in Budapest trading. OTP Bank's biggest one-day decline in 10 years was "unfathomable'' and the capital and liquidity of Hungary's biggest lender are ``extremely strong,'' according to OTP Chief Executive Officer Sandor Csanyi. Hungary's financial markets regulator, which is known as Pszaf, has said it will cooperate with European Union authorities to probe OTP trading for possible share-price manipulation, but meantime, as analyst Marta Czajkowska ( of KBC Securities, Warsaw) says, the damage is done: "The bank's valuation will certainly be under pressure now and this will not change in short term. The market sentiment must change first.''

The Hungarian government has offered to guarantee OTP Bank's interbank lending, according to a joint statement by János Veres, András Simor and OTP Chairman-CEO Sándor Csányi. OTP stated that they were not accepting the offer, and cited the bank's stable capital and liquidity conditions.

Veres stressed that he considered the Hungarian banking system to be stable, well-capitalised and that nothing had changed in this regard in the past few days.

Csányi reiterated his recent statements that he considers OTP's capital status and liquidity condition to be extremely good and that the bank will not need to tap capital markets until the end of 2009. He stated categorically that OTP bank had not been buying its own shares in bulk over the past days and indicated that it was the banks intention to avoid this option.

Csányi claimed that a speculative attack had been launched against OTP, especially in very late trading on the Budapest Stock Exchange (BSE) on Thursday and said the bank had already reported the case to authorities. He suggested that those reporters who wished to know the name of the London-based hedge fund which placed the very large sale order that caused the 22% drop in OTP's share price on Thursday direct their questions to the regulatory authority.

Basically, the crossover we need to be thinking about in macroeconomic terms is the one between the Swiss Franc and the Hungarian Forint, given the exposure of Hungarian households to Swiss Franc denominated mortgages, and the impact on internal demand which is to be expected if the current dramatic decline (see chart below) continues.

Basically I say Hungary is caught in the scissors here, becuase apart from the financial economy, we need to think about what is going on in the real one. Both external and internal demand are plummeting, and the Hungarian authorities badly need to inject some support to the real as well as the financial one, but this would mean loosening interest rates, and this is just what the authorities can't do, since the shortage of liquidity and the pressure on the forint make that impossible. So as far as Hungarian citizens and economic growth goes, it is down we go time, and the only remedy which I see on the table is simply "grin and bear it".

Update Friday

Hungary's debt agency AKK have this morning announced plans to cut net government debt sales by 200 billion forints ($1.09 billion) over the rest of the year. Despite this the government debt market remained at a near standstill.

The AKK said that the amount of government bonds to be offered at auctions would be reduced by 40-50 percent. Three- and 12-month Treasury bill sales will fall by 10-20 percent, and the agency will hold more auctions of shorter-maturity "liquidity" bills.

A 15-year bond auction scheduled for Oct 22 was cancelled.

"During the rest of the year, only expiring debt will be refinanced, in a modified issuance structure, with the intention to help market consolidation," the AKK said. Trading in the government bond market effectively came to a standstill yesterday as the global liquidity crunch hit markets in Hungary and elsewhere in central Europe.


Anonymous said...

As the finance manager of an exporting company, I tried to do forward currency contracts (sell EUR against HUF 12 months forward) on Friday. I tried 4 banks, and only OTP were willing to do it, but they refused to calculate forward rates in the usual way (with interest differentials), instead they offered forward HUF/EUR rates BELOW the spot rates, without any explanation of how they arrived at the numbers.

Edward Hugh said...

Hello anonymous,

Thank you very much for this personal testimony. I appreciate what a difficult time this must be for you, and I wish I could bring a more optimistic tone to my reporting and analysis of events in Hungary at this moment.

All I can say is that my heart goes out to all of you at this time, and, against all prognosis of fortune, I wish you the very very best.


Anonymous said...

Thank you Edward for cutting through the avalanche of information and giving us expert insight.

As a CHF mortgage holder in Budapest I'm very worried.

I hope Hungary's government, financial system and banks can weather this storm.