Hungary To Get Support Directly From The IMF (Updated)

Well this is hot news, just coming off the Reuters wires. Basically it seems that the International Monetary Fund is ready to offer financial and technical help to Hungary, effectively stepping in and offering its support at a time when EU resources are under considerable strain. The EU has said it welcomes the intervention. Under the circumstances there really was little else it could do.

"The Ecofin (EU finance ministers) welcomes the readiness of the IMF to consider providing technical and financial assistance as needed to Hungary," the executive European Commission and the EU's French presidency said in a joint statement.

The statement said they was following the situation on Hungary's financial markets closely following severe pressure on the forint and Hungarian bonds on Friday. Hungary's main stock index plunged 24 percent last week, the forint weakened 4.8 percent and the yield on the benchmark five-year bond soared to its highest level in almost nine years. The forint rose to 252.41, from 257.8 late on Friday at 10:04 a.m. in Budapest. while the BUX index was up 6.94 percent following the announcement.

Hungary has been hit hard by the global financial crisis because it has one of the most fragile economies in Europe due to its high budget and current account deficits and heavy reliance on external financing. The EU authorities said they were in contact with Hungary to ensure that any conditions attached to possible IMF aid were consistent with economic goal agreed with the EU.

The International Monetary Fund have issued a statement, which says it is “in close dialogue" with the local authorities and the European Union to discuss further responses to the current challenges, including possible technical and financial support by the IMF. The statement by IMF Managing Director Dominique Strauss-Kahn on Hungary is as follows:

“Against the background of global financial turbulence, Hungary's government securities market and some other key markets have experienced stress over recent days."

“These pressures emerged despite the country's improved macroeconomic and financial policies of the past years, which include a strengthening of its fiscal position, a narrowing of the current account deficit, and a cautious implementation of monetary and exchange rate policies."

“The authorities have responded to the recent turmoil in global markets through a continuation of their macroeconomic convergence program, coupled with enhanced monitoring of financial sector developments and increased deposit guarantees, which were augmented in line with an EU-wide move."

“To complement these efforts, we are in close dialogue with the Hungarian authorities and the EU to discuss further responses to the current challenges, including possible technical and financial support by the IMF."

“I have informed the authorities that the IMF stands ready to assist their efforts. We will provide technical assistance as needed and, in the context of a supportive policy setting, are ready to undertake discussions on possible financial assistance, responding rapidly."

I will try and find the time to update during the day, as more information becomes available.

Update


Market reaction to the IMF announcement has been pretty swift, but this was to be expected. By late morning the benchmark BUX stock index was up as much as 10 percent, the forint extended a gain against the euro to 3.6 percent and the benchmark government bond rose the most in almost five years. OTP Bank, Hungary's largest lender, surged as much as 23 percent.

The cost of protecting Hungary's government bonds against default dropped 32 basis points to 338, the biggest decline in three weeks, after more than doubling to a record this month.

This is all good news, but nothing to get euphoric about. The IMF has not put up any money yet, and has simply limeted itself to saying it will do if needed. But this guaranteed will be honoured, and it will need to be.

So then we will need to see just what kind of package is involved, and what the attached "strings" are going to be, before we can assess the macroeconomic consequences. At the real economy level, nothing changes for the time being, and the situation continues to be "preoccupying".


Hungary's MKB Bank has also announced that it is going to stop lending in euro- and Swiss franc-based loans for an unspecified period. The decision has no impact on already approved loan applications. MKB said the forint's huge volatility in the past weeks, especially its marked depreciation at the end of last week, make the outlook on the currency more uncertain than it has ever been.

In the same vein, Gyula Tóth, analyst at UniCredit (ouch!) in Vienna is widely quoted to the effect that the proposal is "a good idea in our view, though clearly short on details at this stage and certainly not something which will reduce HUF volatility in the m-t to the extent that the IMF is unlikely to support anything but a HUF freefloat."


Portfolio Hungary makes the point that MKB is not the only local bank that is cuuting its risks risks by reducing the availability of FX loans, which have sharply decreased or even disappeared at other credit institutions, as well.

In an interview with Portfolio.hu, Csaba Lantos (former head of OTP Bank's retail business) said the ratio of foreign currency-based lending is likely to fall to below 50% within total loans. Sine new retail mortgage loans in Hungary have been almost exclusively foreign currency in recent months, PH point out that:

"Should the suspension of FX-based lending become a permanent phenomenon and other banks follow suit, it could greatly discourage people from taking out loans, as the current HUF interest rate levels are not exactly attractive".

Exactly, and this is precisely why the whole macro cocktail Hungary is drinking at the present time is so devilishly complicated.


Hungary's government today (Tuesday) urged European Union leaders to allow the European Central Bank to intervene in the markets of the 27-nation bloc that don't use the euro to protect the economies of eastern Europe. Hungary's prime minister Ferenc Gyurcsány said he will plans to argue that the EU should help build a safety net for the bloc's poorest members.

``The European Central Bank, regardless of whether a country is a member of the euro zone, should use the same intervention facilities to serve the interest of EU national economies,'' Gyurcsany said at a press conference in Budapest today after meeting with Hungarian business leaders.

Gyurcsany also indicated that he plans to propose at the forthcoming EU summit that the requirement for member states to cut budget deficits to below 3% of GDP be relaxed during the current crisis.

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.

Hungarian Exports Fall In August

Hungary posted a trade deficit of EUR 103.7 million in August, according to first estimate figures released by the Central Statistics Office (KSH) today (Thursday). This compares with a deficit of EUR 365.1 m in July and EUR -176.5 m in Aug 2007. Exports - at EUR 5,378.3 m - were down 0.7% year on year, which compares with a growth of 8.2% in July. The last time the 12 month export index was in the negative territory was in June 2003 (-1.3%).

Imports - at EUR 5,482 m - were down 1.9% year on year, while in July they were up by12.4%.





Tightening credit standards and the cut-back in credit lines to producers and wholesalers suggest there will be a further dramatic fall in new orders, which is likely to weigh on export performance. The question is how long and how far credit standards will continue to tighten, but the chances of a prolonged deterioration in financial conditions have increased, pointing towards sustained weakness in the real economy for some time to come.

Predictably the financial markets are not to enthusiastic about all this - since with internal demand contracting and now external demand folding to it doesn't look like we will see much in the way of growth (if any) during the second half of the year - and the forint which had opened today's trade at around 251 and firmed to around 249 to the EUR was hit hard in late afternoon trading and dropped to above 259 in the space of five minutes. By 17:00 it was already at 257, 2.8% weaker than at opening and after 17:00 it broke through 259, a 3.8% depreciation against today's high point of 249.


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.