tag:blogger.com,1999:blog-36596111.post1846798587716866937..comments2009-09-21T11:07:15.010+02:00Comments on Hungary Economy Watch: Hungary To Get Support Directly From The IMF (Updated)Unknownnoreply@blogger.comBlogger6125tag:blogger.com,1999:blog-36596111.post-36198569668559965912008-10-16T08:56:00.000+02:002008-10-16T08:56:00.000+02:00Kemmiwinks,Incidentally, "Just for starter the NHB...Kemmiwinks,<BR/><BR/>Incidentally, <BR/><BR/>"Just for starter the NHB reserves can cover 3-4 years of CA deficit and the structure of foreign financing is long term."<BR/><BR/>As I suggest above, this isn't a normally used criterion of financial robustness. What really matters is the ability to cover the CA deficit month by month, not sit back and wait till the reserves are done. <BR/><BR/>The key issue at the moment is that Hungary (along with much of the rest of Eastern Europe) is sufferening from what is known as a sudden stop. Basically there is no foreign currency coming in to lend, and if there is no foreign currency lending in Hungary, it will mean the capital inflow will be smaller. Currently that capital inflow amounts to about €3-€4bn a year, which is close to the current account gap. The ECB is stepping in this morning and lending about 5 billion euros, which will cover you for a year on the CA deficit (for example) but this is only to give time to restructure everything a move away from forex mortgage lending, which is finished I think, for this generation at least.Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-36596111.post-44774348058665906352008-10-15T23:42:00.000+02:002008-10-15T23:42:00.000+02:00Daniel,"but the excesses seen last week were a com...Daniel,<BR/><BR/>"but the excesses seen last week were a combination of not-well-informed blocked trading from overseas investors, domestic strategic portfolio decisions,"<BR/><BR/>History, as is well known, is nothing more than a sequence of rather unfortunate and badly timed accidents. Such accidents, however, only constitute what the Greek historian Thucydides would have called the "efficient cause" (or trigger) for events. The "final" (or underlying) cause has always to be looked for by digging deeper, otherwise you end up with a view of life as nothing more than "one damn thing after another", and there is no room for such a prototypically human activity as scientific investigation.<BR/><BR/>Now.... <BR/><BR/>Fitch ratings agency specifically warned that what happend last week was going to happen, and I publish the report which covered their warning below. Where they especially prescient. I doubt it, they simply have a lot better idea of how things actually work than many of the people churning out sq kilometres of newsprint for the Hungarian press at the moment.<BR/><BR/>***********************************<BR/><BR/><BR/>Fitch Ratings has said on 13 May 2008 that foreign currency lending in Swiss francs and Japanese yen remains an important additional risk to the Hungarian banking sector's financial stability and is unlikely to disappear in the near future. <BR/><BR/>In a special report published today, Fitch noted that “full-cycle credit costs of foreign currency loans are hard to estimate, given the still adequate credit environment and overall favourable movements in foreign currency. In particular, foreign currency lending to retail borrowers is risky as these customers have typically no foreign currency income sources and are therefore unhedged." <BR/><BR/>“The asset quality of retail loan portfolios at Hungarian banks has not deteriorated materially to date. However, this needs to be seen in the light of a banking sector that, like in other CEE countries, has not yet been subject to a full economic cycle, irrespective of the economic slowdown since 2007," said Michael Steinbarth, Director in Fitch's Financial Institutions team. <BR/><BR/>“In addition, the HUF weakening has only been temporary so far and is not sufficiently long to pose serious asset quality problems for the banks," he added. <BR/><BR/>“The mostly favourable currency and interest rate movements so far have left borrowers and lenders with a perspective of limited downside risks," Fitch said, adding that it understands that while the National Bank of Hungary (NBH) has reacted to inflationary pressures stemming from a softer HUF to date, “it may prove risky to rely on the central bank to continue hiking rates if the HUF weakens further". <BR/><BR/>“In addition, the re-emergence of global inflationary pressures is also likely to pose another additional risk factor as potential global interest rates hikes could affect the asset quality of foreign currency loans extended by Hungarian banks." <BR/><BR/>Foreign currency loans have grown continuously over the last four-to-five years as interest rates on them are substantially lower compared to loans in HUF. <BR/><BR/>At end-2007, around 90% of new retail lending was in foreign currency, in particular in Swiss francs, Fitch noted, adding that retail loans in foreign currency totalled around HUF 3,216 billion or about a fifth of the banks' gross loan books. <BR/><BR/>At present “the banking sector is sufficiently capitalised and can withstand some external shocks," Fitch said, adding, however, that “this could change if there were to be multiple shocks, including a prolonged weakening of the HUF and a sharp correction of real estate prices".Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-36596111.post-63220946502725396322008-10-15T23:12:00.000+02:002008-10-15T23:12:00.000+02:00Hi Daniel,"One reason of the strange prices was a ...Hi Daniel,<BR/><BR/>"One reason of the strange prices was a large scale speculation and equity reorganization within Hungary"<BR/><BR/>Well, this is what people are saying everywhere, and I just don't think it is as simple as that. In addition people can't be constantly changing hats, and be "serios investors" one day and "naughty speculators" another.<BR/><BR/>My whole view, as I have been arguing pretty consistently on this blog for some time now is that the whole position with the forex lending always was unsustainable, and that this was always going to happen.<BR/><BR/>I think the IMF is your best bet in the short term. You will be safer in their hands than simply left to the vagiaries of what are at this point pretty violent market reactions. The only tragedy is that once you are more or less safe, the next people to go (after the Baltics, who I think are already more or less "gone") will most likely be Romania and Bulgaria. I keep looking nervously over at Poland every day and keeping my fingers crossed.<BR/><BR/>"At the moment I believe that there will be a strong co-operation with the ECB and IMF but Hungary more likely will not use the facility offered by IMF."<BR/><BR/>I think we are going to hard times Daniel, we are going to hard times. And I think psychologically it is better to get ready for them.Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-36596111.post-82744724891758698572008-10-15T23:04:00.000+02:002008-10-15T23:04:00.000+02:00Hi Lemmiwinks,"I think you are paying to much atte...Hi Lemmiwinks,<BR/><BR/>"I think you are paying to much attention to the IMF news."<BR/><BR/>Well, I'm afraid I don't agree. I think the situation is pretty urgent, and that the IMF would be a good solution to your short term problems. Long term you need some sort of action plan to turn yourselves round as a country on the demographic front.<BR/><BR/>Now the immediate problem is that the finance for forex mortgages has dried up. This brings one part of your financial system to a "sudden stop", since there is no longer the availability of credit at affordable rates.<BR/><BR/>Then you are facing the possibility of a rapid outflow of funds as investors throw the towel in, and the currncy tanks as a consequence.<BR/><BR/>You are losing sight I think of the real economy situation here, with private internal demand already flatlining (and to the downside), government spending set to continue to reduce and export markets - which are your only real hope for any sort of growth in the future entering a very difficult period as country after country falls into what looks set to be quite a lengthy recession. <BR/><BR/>So with Fx lending gone, domestic consumption, business and investment demand has to fall back on HUF borrowing, and the prohibitively high rates which the NBH is charging in order to protect the forint. You bring rates down to help the real economy and out the money goes, and then the HUF tanks, bring pain to all those with CHF mortgages.<BR/><BR/>So basically domestic interest rates will need to be steadily brought down and the HUF will find a lower level, which will bring distress to households, and this is why you need the IMF support and guarantees in my view. I don't know how the hell they are going to do this, but I do think that the IMF is your best hope of making the transition away from forex lending dependence, which is now unsustainable.<BR/><BR/>I don't really know enough about the details of your banking sector, and just how much of their lending, say OTP, has financed by recourse to things like covered bonds, but if the CHF lending has to some extent been financed by the issuance of some form or other of RMBS's over the last couple of years, then of course the banks - just like the Spanish ones that I do know about - will need a lot of support as the defaults mount and the haircuts are allocated.<BR/><BR/>"Just for starter the NHB reserves can cover 3-4 years of CA deficit and the structure of foreign financing is long term."<BR/><BR/>Well reserves are around $26 billion, and one months imports are about $10 billion, so you have about two months forward cover on imports (this is the standard measure of reserve soundness), which is not a lot it seems to me.<BR/><BR/>Brazil, which is pretty sound has 18 to 19 months, for example, while Ukraine (which isn't) has only about 4, and Hungary is below this. So I'm not that impressed about the strength of reserves situation if oush really does come to shove. Really I doubt anyone would be calling in the IMF at this point just for their own "glory".Edward Hughhttps://www.blogger.com/profile/10384039867580949531noreply@blogger.comtag:blogger.com,1999:blog-36596111.post-65356457001928518432008-10-15T14:30:00.000+02:002008-10-15T14:30:00.000+02:00I think you are paying to much attention to the IM...I think you are paying to much attention to the IMF news. <BR/>Turning to the IMF was not a necessity but a communication mistake made by the ever hyperactive PM, who has been in a constant crisis of confidence for 2 years, trying to pose once again as the saviour of the country. Hungary by no means needs the help of IMF. Period.<BR/>Just for starter the NHB reserves can cover 3-4 years of CA deficit and the structure of foreign financing is long term.Lemmiwinkshttps://www.blogger.com/profile/17888530968877107303noreply@blogger.comtag:blogger.com,1999:blog-36596111.post-39837801747643948392008-10-15T08:49:00.000+02:002008-10-15T08:49:00.000+02:00Hugh, I think we are in a pretty mess but I also t...Hugh, I think we are in a pretty mess but I also think that some problems were overstated or overseen by the overseas institutional investors and last weeks drama was not as severe as it might seem from a Reuters monitor. One reason of the strange prices was a large scale speculation and equity reorganization within Hungary, which involved our wealthiest domestic investors. I mean if you look at the three day performance of OTP you have to wonder that some people lost an awful lot of money and other must have gotten very rich.<BR/><BR/>Personally I made my best personal investment when I bought OTP shares the day before the IMF announcement. This was a strange trading day: all institutional investors were selling stocks and Hungarians busy buying them because we knew that some of the considerations of the sellers were mistaken.<BR/><BR/>There was a big nervousness in the forint market, and indeed, the swap market has no liquidity, and for this reason some banks suspended franc and euro lending. There seemed to be a serious conterparty risk, but most people were unaware of the fact that a botched IT maintenance in the clearing house was the biggest problem on a critical day. <BR/><BR/>All in all, the Hungarian economy remains highly fragile, but the excesses seen last week were a combination of not-well-informed blocked trading from overseas investors, domestic strategic portfolio decisions, annoying glitches in the worst time besides the international crisis.<BR/><BR/>At the moment I believe that there will be a strong co-operation with the ECB and IMF but Hungary more likely will not use the facility offered by IMF.Antal Dánielhttps://www.blogger.com/profile/13982036207587080662noreply@blogger.com