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Friday, March 06, 2009

It's Official, The Hungarian banking system is sound

It all started as an idle conversation in the loo apparently. The next thing The National Bank of Hungary (NBH) and the Hungary's Financial Supervisory Authority (PSZÁF) had to come out in public to declare that they were closely monitoring the status of the financial system, adding that from what they could see from their monitoring the Hungarian banking system is sound, and depositors' money safe.

The problem was not the loose talk in the lavatory (at the Hungarian Banking Association apparently) but the fact that that august body then sent out a letter, warning its members about the existence of “groundless rumours" that banks were planning to freeze deposits on 13 March. Possibly this is the quickest way to start a run on bank deposits known to humankind.

Hence the PSZAF and the NBH had to stop in and stop the rot. As Portfolio Hungary point out, this is now the third time in a week that something inane has happened (first there was Prime Minister Gyurcsány's press conference in Brussels, then there was the joint declaration of bank regulators (which excluded Hungary) and now this. No wonder the forint dropped to a record low of 317.22 per euro today. Yields on Hungary's government securities also shot up today, especially at longer maturities in trading which Portfolio Hungary described as "non existant". According to Government Debt Management Agency (ÁKK) data, yields on the 3-yr benchmark leaped by 69 basis points to 14.35%; the 5-yr benchmark yield went to 13.44% and an 80-bp increase took the the 10-yr bond to 12.74%. The point here is that Hungary is looking at a 5% GDP contraction this year, and with yields like this we are evidently heading for no good place next year as well. What Hungary needs is some kind of external support that can break this whole dynamic, otherwise there is no only one way this can end. Is anyone listening there?

More theatricality was addded when Tamás Bánfi, who is a member of the National Bank's Monetary Council, came out and said that sovereign default was not an option, when you are reduced to saying this things are getting bad. I mean, did anyone in Hungary seriously think it was?

“There will be no sovereign default in Hungary because it cannot be allowed. It must be thwarted by policymakers and they do have the instruments that have a transitional or lasting effect in this regard," Bánfi, a member of the central bank's (NBH) rate-setting body, told local daily Népszava in an interview on Friday.

And Bánfi is not the only one to be trying to reassure here, since Government Debt Management Agency Deputy CEO László András Borbély was out doing it yesterday. "Hungary is not threatened by sovereign default either in the short or the long term", he said "partly thanks to the continuity of government securities issuances and partly because of the major international credit facility."

And this is undoubtedly true. The government can continue to borrow money, but can it ever pay it back, this is the real question. As if in response CDS's went heading on upwards today, and Hungary's 5-year CDS spread rose to a new all-time high of 619.9 basis points, up from Thursday's close of 618.6 bps and considerably above the earlier record high set at 605 bps during last October's financial crisis. The point is with selling bonds getting more expensive, insuring debt costing more, and the economy contracting, it is hard to see how you can square the circle here.

Especially if your industrial output is falling at an annual rate of 21% a year.

Unsurprisingly GKI's economic sentiment indicator fell to a record in February as businesses struggled with falling orders and consumers for more job losses.

The saddest part about all this is that I have the impression Europe's leaders have no idea at all how it is Hungary got into this mess, and worse, I doubt they are really going to take the trouble to actually find out.


Anonymous said...

Europe leaders will act when CEE leaders ask them. The problem is most of CEE leaders are still in lalaland, they came out on the railroad and are whistling with dummy smile on their face, while Transeuro Express is coming behind their back with 330 kmph:)
Nothing suprising actually if you have tracked these countries since 1989...
Hungary has to duck till Poland falls of the cliff. Only them things are going to start moving.

Anonymous said...

Will the Hungarian government ever be able to repay its debts? Good question, really. But we will give you a good answer as soon as you tell us with equal certainty if the Irish or the Italian or, for that matter, the Polish governments are likely to be able to repay their debts. True, CDS spreads are now high and increasing, but they are high and increasing for others as well, who are somehow much less frequently singled out in the international press. Eg. Bloomberg reported yesterday Hungary's January industrial output reading as "the steepest slump in the EU". How did they know? Would it not be wiser to wait until all EU countries report their January output data? It has not happened yet, so the facts are not known, and still, the negative conclusion is drawn at once, fresh, hot and attractive.

Edward Hugh said...


"Will the Hungarian government ever be able to repay its debts? Good question,"

It's a very good question I'm afraid. Look, I imagine you are Hungarian, and I appreciate your national pride, but there really is a problem here, and the sooner you face up to it the better. Just telling me that I am wrong won't help. This ism't a football match.

"so the facts are not known, and still, the negative conclusion is drawn at once, fresh, hot and attractive."

Well, again, look, I am not reponsible for what they say in the (irresponsible) press. I can only tell you that I opened this blog in December 2006, as soo as I realised how serious the problem was in Hungary, and that the "austerity package" being introduced simply wouldn't work.

To find out why I thought it wouldn't work you have to read back through the posts, I'm afraid, but it doesn't make me especially happy to have been right.

The problem is, in a nutshell, you have an ageing and declining population, and during your demographic transition (like in the case of many of your East European neighbours) fertility levels fell to very low readings, while life expectancy continued to remain low. This is not a "normal" pattern, and makes it curious that any where able to convince themselves that some sort of convergence with the West was posible.

To have convergence you will need to raise both fertility back up to near replacement levels (as they have done in France, Scandinavia and the UK) and raise life expectancy by a very substantial investment in the health of your population.

As the bravado in the world won't get you out of this one.

Why do I know your public finances will go bust, quite simply because your GDP is contracting even as your expenditure is rising (structurally, not just the crisis). The crisis simply makes this worse, since you are having to pay so much more ineterest to finance the debt, which of course I am totally opposed to, but what the hell can I do, I am not lending you the money? (Would that I had it to do so).

The problem is, as your workforce declines and ages, your output and your consumption will also decline, even as the debt rises. This path is unsustainable.

Hungary has to live from exports, but as we are seeing now in the cases of Japan and Germany (who have long been suffering from ageing related questions, it was my interest in the economic dynamics of these countries that first got me interested in Hungary - Hungary is, in many ways, a poorer version of Italy).

The thing is Japan and Germany have much higher life expectancy than Hungary, and can offset to some extent by putting the 60 to 70 age group to work (these would be the labour reforms you have coming),and they have been able to leverage their export prowess sufficiently to run ongoing surpluses. This is what Hungary has to do, but first you have to get out of the crisis and start running surpluses.

It is because I don't think you can do this in the time window available that I am not optimistic you can avoid default.

At present the policy seems to be sending people home as unemployed and increasing external debt. Personally, I fail to see that this can be a way out for you, produce less and borrow more.

I am on record as being in favour of creating a large quatity of EU bonds, (Union bonds, not local national ones), the entry of the East European countries in the Eurozone and the printing of money at the ECB via quantitative easing.

In my view the only way to save Hungary and Latvia from default lies along this road, and rather than pointing the finger at me you would be better pointing it at your neigbours in the Czech Republic and Poland, who have been busy trying to say how different they are (see my earlier recent posts).

Hungary's problems are grave, and there is no sense in denying this. So too, as you point out, are those of Ireland, Austria, the UK, SpainGreece and Italy. Europe's problems need a collective, EU solution. The US would never dream of telling the markets "go eat Florida", and I see no reason why we should be saying to them "go eat Latvia dn Huingary", let's see if that quenches your appetite.

Anonymous said...

Well, I do not remember exactly saying you were wrong, particularly in claiming that Hungary (and Poland, Romania, etc.) should fall under the same rules of monetary policy within the single European market, as do the lucky member states of the Euro Area. Moreover, not even in saying that Hungary is facing very substantial problems regarding its public finances. My point was that the world has recently taken up the habit of putting an extraordinary amount of uninformed an unjust blame on Hungary, forgetting about the fact that its macro performance is in fact not very different from the rest of CEE, or indeed, increasingly from that of the whole rest of the world. I realise you know much more about the region than the average analyst or reader, yet you are joining the mainstream by putting Hungary in a distinguished negative light from time to time. Right now, we see Poland running into more of a currency weakness and financing problem than Hungary, Romanian GDP going through a landslide in Q4 2008, Bulgaria facing a major disruption in its net capital imports, Slovakia to have lost its legendary price competitiveness because of the conceptually flawed ERM2 system, and effectively everyone's industrial output declining very heavily, yet your first and harshest negative comments are directed at Hungary, suggesting that the problems there are something special. Please, be aware that even if this kind of suggestion was far from your intention, which I am sure about, the people reading your stuff will probably not have the same insight and therefore judgement on the details as you do, and will interpret your message against the backdrop of the global rubbish that is currently called as CEE research.

Anonymous said...

I was suspicious of this but this response is actually admittance that you have a pet theory(not saying it doesn't have root, not saying that in long run it is very important) but you are applying in wrong manner, and you got yourself behind the curve. There is never only one explanation, if you fall in that trap, you will end up not seeing the facts.
Now you will accuse me for being victim of national pride, but I think you should go more in depth when analyzing and putting judgement. You should revisit graphs on consumption, compare with tax policies, employment figures, and check what caused changes in employment.
One more thing, having bubbles of all kind when entering a credit crisis is not making your position better, but worst. Hungary was actually working out some of its bubbles created prior to 2006, our peers are still convinced they are bubble free territory. Again, not saying everything is cool and perfect here, if you check hungarian analysts, nobody is telling that here.

Edward Hugh said...

Hi again,

"I was suspicious of this but this response is actually admittance that you have a pet theory"

Yes, you have caught me out. I am here trying to calibrate a much larger theory :) But then, at least I am empirical. Hungary has a lot lower median age than Germany, Japan and Italy, which are the economies I know most about. The big difference here seems to be life expectancy, and it is the impact of this that I am trying to measure. I think this is very important for all the CEE economies.

Normally economies become totally export dependent when they reach 43 - no more housing booms, no more bubbles, these become theoretically excluded, and the empirical dat backs up the theory. Japan had near zero interest rates, but the last housing boom ended in 1992. Italy and Germany had the same interest rates as Spain and Ireland, but no bubble, they blew theirs out in 1995.

I agree with you, Hungary will have no more bubbles. I will go even further, I doubt retail sales will ever again hit the early 2006 levels (in real terms, of course). This sort of thing is testable, and I hope you will stay around, listen and point out the error of my ways to me if I have it wrong.

I am a big fan of my former university teacher, the Hungarian Imre Lakatos, we should ruthlessly test ourselves, every day, against the data.

"You should revisit graphs on consumption, compare with tax policies, employment figures, and check what caused changes in employment."

Well consumption as far as I can see really maxed out in 2002, we get a second wave at the start of 2006, but this seems to me a by-product of the increase in public spending which is presumeably a response to the decline in household consumption as a driver, rather than the cause of Hungary's imbalances as far as I can see. Strangely I see something similar in Portugal in the late 1990s.

The big diference between Portugal and Hungary is that you are likely to become much more competitive in manufactured exports as far as I can see.

Now on the tax wedge and employment, it is interesting to look at the German example. They have created lot of extra jobs, but the net value added has been very low. They are more export dependent than ever, as we are seeing now.

However, I would day that Hungary should make these reforms (there is really no alternative), but just don't expect as much from them as it says in the publicity blurb. You will be export dependent, and there isn't much you can do about that now, especially as people have to pay down all those CHF loans with such a low forint, and declining wages and high unemployment in the short term.

"Hungary was actually working out some of its bubbles created prior to 2006, our peers are still convinced they are bubble free territory."

I don't see bubble problems in either the CR or Poland (ie in the rest yes), although I do see heavy export dependence in the CR and silly zloty options problems in Poland. Plus regional contagion will mean that no one is immune.

On employment

Anonymous said...

Related to bubbles in CR and Poland, you refered to European housing review 2008 in a post on Estonia, check price change for Poland. Also, recent data show growth of housing loans in Poland for Q1-Q3 2008 at 45% yoy, most of which cam in CHF, of course. For CR, I've seen a CNB analysis (I don't have link though) which was pointing that housing might went into bubble. But for CR I think they have the biggist bubble in CEE, the CZK (thanks to "convergence game").

If we compare growth in Hungary and its peers, it was lousy. But if we check industrial production, Hungary doesn't seem to be behind it peers. The difference comes mostly from construction and retail sales and shrinking goverment consumption.

Related to exports, I think only CR reached surplus in the region, and Hungary reached at least some sort of balance, while the rest was mostly deterioration during boom years.

One point for employment is a structural issue for all CEE countries(which is more or less visible in data) is that there is a large portion of now mid aged people, who had some sort of skill which was useful only in previous system, usually accompanied with bad health. They end up as unemployed or early retirees and there is not much option what to do with them, but they will make less percentage of working population in future.

So yes, we have a shrinking population, we know we need to export and we know we need immigration. Hungary is very pleasant place to live, nice capital, cause little towns in countryside :)

If you check history of Hungary, it is all about immigration and integration of newcomers (Hungarians, Germans, slavic neighbors, but asians as well, only period of two WW and communism was exception).
We had a depression in 90s and we didn't default, goverment here usually wait till last moment, but then finally acts. If the crisis is handled properly, we can attract some population, but on the long run lifestyle has to change everywhere in Europe.

My point is, it is not yet end of the road for this small but proud country :)