Action In The Pipeline On CHF Mortgages

This morning (Friday) off the Bloomberg wires:

Hungary is drawing up proposals to help borrowers whose foreign
currency-denominated loan payments rose as the forint weakened, Prime Minister
Ferenc Gyurcsany said. The government is in talks with banks and will present
proposals next week that will “significantly ease” the burden of borrowers,
Gyurcsany said today in a public television interview. The forint has been
battered along with Hungarian stocks and bonds as investors sold off riskier
emerging market assets. Foreign currency borrowing by local businesses and
consumers, along with slower growth and a wider budget deficit than elsewhere in
eastern Europe, make the country a target, economists said.”

This is the bail-out Hungary will need, a battery of measures to help those with CHF mortgages pay-down their debt, or transfer them over to (subsidised) HUF ones. Hungary, given the fiscal straightjacket she is now in, and the very large costs of population ageing that are now about to hit simply is not able to generate the resources to make this transition alone, and that is why the IMF will have to help.

Hungary Is Headed For A Substantial Recession As Foreign Exchange Lending Seizes Up

Hungary's agony has simply dragged on and on all this week with both currency and stock markets falling sharply while bankers continue to report acute credit shortages. At the same time contagion has started to extend its ugly reach right across eastern Europe, with Ukraine, the Baltics and Serbia (at a minimum) all in ongoing negotiations with the IMF, as the credit crunch which followed in the wake of the latest bout of global financial turmoil really starts to bite.

"Many central and eastern European countries simply don't have either the financial strength or the technical expertise to bail out banks,'' said Lars Christensen, a senior emerging-markets analyst at Danske Bank A/S in Copenhagen. "It's like an Iceland look-a-like contest and there are a number of candidates looking very fragile at the moment.''

The ECB announced this morning that is to extend a helping to the suffering Hungarian markets, providing up to EUR 5bn of liquidity to the Hungarian central bank (MNB). This move will surely help boost the MNB's defence of the forint. Hungary's FX reserve is at present EUR 17½ bn. This equals less than 3 months of imports, which is normally considered to be the critical level for FX reserves. Among the EU8+2 countries, Slovenia (euro member), Lithuania, Slovakia, the Czech Republic and Estonia have similar small FX reserves.

Emerging-market banks plunged yesterday after Standard & Poor's warned that Korea's lenders will struggle to refinance debt, raising pressure on developing nations to bail out their own institutions. Standard & Poor's has announced that it placed its 'BBB+/A-2' sovereign credit rating on Hungary on CreditWatch with negative implications. S& P has also placed the following ratings on Ukraine on CreditWatch with negative implications: its 'B+/B' foreign currency and 'BB-/B' local currency sovereign credit ratings on its global scale; and its 'uaAA' ratings on its national scale. Hungary has a 'BBB+' rating at Fitch and 'A2' at Moody's.

In Budapest on Wednesday the forint fell 5.3 per cent to Ft266.09 to the euro and the BUX leading stocks index closed with a fall of 11.9 per cent, dragged down by a 15 per cent per cent fall of shares in OTP, Hungary's biggest bank. Currencies and stock markets have also been falling in Poland, the Czech Republic, Romania and Ukraine.

The European Central Bank also announced yesterday that it will support the Hungarian central bank's money market operations with as much as 5 billion euros ($6.7 billion) to help it ease the present financial tensions. The agreement will provide the central bank with a facility to borrow up to 5 billion euros in order to provide additional support to the central bank's operations, the ECB said in a statement this morning. The move will support the Hungarian central bank's "instruments of euro liquidity provision.'' This move is an important "first", since Hungary isn't a member of the 15-nation euro region, a may well set a precedent which will need to be followed as more and more of the walking wounded limp over and present themselves at the Kaiserstrasse front door, before being politely shown round the back to the overnight lending window.

According to Portfolio Hungary:

Chaos rules among institutional investors, as well, at least the majority of the investment fund managers polled by Portfolio.hu on Wednesday admitted, speaking on condition of anonymity, that they have absolutely no idea about the possible outcome of the current financial crisis. A number of them noted they are at a loss as to what to do with their portfolios in the current situation. Interestingly enough, the only parallel the respondents were able to draw between the present predicaments and the 1998 Russian economic crisis was the mass unwinding of leveraged positions.

As one fund manager interviewed said “From this perspective, the current situation is the same as in 1998 only to the second power. Margin calls are being received, you gotta put in the deposits but as there's no money you have to execute brutal sales irrespective of the price of assets.....Frankly, I haven't got a clue as to when and how this would end, I'm just staring into empty space."

One of the main problems Hungary is facing right now is that if foreign currency lending continues to be discontinued in Hungary on a "sudden stop" basis, then this will mean that domestic economic activity will slow sharply and capital inflows will be considerably reduced which is bound to cause one hell of a problem since at the present time these capital inflow amount to about €3-€4bn a year, and are close to providing the cover needed to fund the ongoing current account gap.

Why Hungary Is Not The Next Iceland

As rumours abound about the imminent formal "bankruptcy" of the Hungarian economy - the BUX stock index fell as much as 11.9 percent today, while the forint slumped 6.7 percent against the euro and liquidity in the foreign exchange market more or less evaporated - many commentators are asking the impertinent sounding question: "will Hungary be the next Iceland". To that question I will give a categorical no. But not for the reason that most standard commentators offer, that, for example Hungarian private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, or that short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland.

I do not doubt that Hungary's short term position is much less leveraged than Iceland's is, although I also don't doubt that the Hungarian financial system will need IMF support to ease the financial distress caused by the unwinding of the foreign exchange denominated mortgage market and the fall in the forint against the Swiss Franc.

No, my reasoning is longer term. The longer term financial and economic future of Iceland is rosy, once they weather the present storm, and learn some belated lessons. I wish I could say the same about Hungary. I will offer three, simple but clear data points.

Median Age

Iceland 34.8 Hungary 39.1

Fertility

Iceland 1.91 Hungary 1.34



Population Growth

Iceland (plus) 0.783 Hungary (minus) 0.254


That is to say, Iceland is a young country, almost reproducing itself in terms of children, and with a rapidly expanding population of working age. Hungary on the other hand is a comparatively old country, with a rapidly ageing population, where each generation is about two thirds of the size of the previous one, and where the potential workforce and total population are now in long term decline.

This is why Iceland - even though it has gone to a huge excess - can sustain a much higher level of "leveraging" into the future than Hungary can, and why in the longer term Iceland is certainly no Hungary. I do not say any of this to criticise Hungary, or its citizens, but really out of a deep seated concern about the future of a country that I do care about. The point here isn't to "have ago", but to illustrate why it was always obvious to me that what is currently happening was always going to happen, and to give voice to my frsutration in saying, for god's sake, why doesn't someone do something, why doesn't someone react?

Postscript

The background to some of the arguments presented above can be found in the following posts:

Have Hungarian Retail Sales Now Passed Their Historic "Peak"?

Hungary Employment and Unemployment March-May 2008

Black Friday in Budapest?

Stagflation in Hungary

Emerging Market Correction and Pressure on the Forint


Just Why Is Hungary So Different From The Rest of the EU10?