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Wednesday, October 15, 2008

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


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?


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?


Antal Dániel said...

There is another notable difference: Iceland, which is the size of Budapest 11th district is not only a very small, open country with an on currency, but it also has bank ownership and the tiny capital reserves may dry up. In Hungary we have circa 50 banks and only one of the major players is partly Hungarian-owned, so their financing does not depend on Hungarian savings.

Although the liquidity of the fx swap markets dried up for days and some banks postponed new fx lending, in fact, sometimes they have more fx founding sources than forint so I clearly do not see why commentators make this a dramatic point.

Edward Hugh said...

Hello again Antal,

I appreciate your concenr and I understand your frustration, but I really do feel you are underestimating the garvity of all this (see my George Bokros post just up).

Having the banks foreign owned isn't a protection in these circumstances, since the parent bank starts to get its credit downgraded back home (as has happened to Swedbank in the context of the Baltics, and Unicredit and Erste Bank in the context of Hungary). Even the Hungarian owned OTP can find itself downgraded due to the risk of its Russian, Romanian and Serbian operations.

It isn't access to the Fx that is going to be the problem, but the willingness of banks to lend in Fx to people who are being paid in forint.

The only real solution would be for the Eurozone to take the whole EU10 into the zone on masse, but with critical situations already in Spain and Italy resources just won't stretch to this, IMHO, so some have to be left to drown in the icy sea, which is why a rescue from HMS IMF is the best bet on the table.

But really, the IMF's own balance sheet is going to need to expand, since the Fund is likely to end up virtually "owning" countries like Hungary.