Will Hungary Go Bankrupt?

Monday, 20 October 2008

On Saturday, Hungarian Prime Minister Ferenc Gyurcsany and 60 top lawmakers, ministers, central bank chiefs and trade union leaders met in a “national summit” to swap theories concerning the impacts of the global financial crisis on Hungary. As anyone can clearly see, Hungary is facing some very significant financial issues and is being hit quite hard by the global financial crisis. Before going further with the content of the national summit, however, I would like to first turn back the clock to try and understand whether or not the Hungarian government is hiding something that is far worse. What is the risk that Hungary itself will go bankrupt?

In order to shed some light on dire situation, I have collected some articles from the past month and created a timeline of key events.
September 15th, 2008: Lehman Brothers files for bankruptcy protection, Merrill Lynch was taken over by Bank of America for $50bn, and the global financial system finds itself in its worst predicament since the Great Depression.
September 22nd, 2008: The following text was widely distributed on Monday morning by the Erste Bank Bond Research Team:

The impact of the global financial crisis on the Hungarian financial sector has been limited, Hungary's financial market watchdog PSZAF said in a statement on Friday. PSZAF said it had surveyed all segments of the financial sector asking institutions to report on their existing or potential business links or any potential losses related to battered foreign institutions. "Based on the data in the survey, banks' risk exposure to the international players affected by the crisis amounts to about 1.3 percent of the Hungarian banking sectors' 2007 equity, and within this the really risky portfolio is only 0.15 percent," PSZAF said. "Based on the survey, the U.S. subprime crisis has had a minor effect on Hungarian financial service providers, they operate in a stable and predictable manner," it said, adding that PSZAF continued to closely monitor the impact of market turmoil. Earlier on Friday, central bank Governor Andras Simor said the financial crisis, which this week saw Lehman Brothers filing for bankruptcy protection, Merrill Lynch losing its independence and the U.S. government bailing out insurer AIG, would not have a significant direct impact on Hungary. "I said and I am still saying that this financial crisis will have no direct significant impact on Hungary," Simor said.

September 22nd, 2008: The following text was also widely distributed by Forbes Magazine:

Global contagion. As a consequence, a truly global contagion is in prospect. All previous crises were geographically limited. They were either mature economy crises with some consequences for some emerging markets, or they were emerging market crises with limited contagion to other emerging market regions or to mature markets. The increased level of integration since the burst of the dot.com bubble means there is a serious risk that the current financial crisis will reach all sectors and all countries:

While the usual weak spots of emerging markets (e.g., Thailand, the Philippines, South Africa, Argentina, Hungary) could suffer substantially in the wake of what is essentially a mature-economy financial crisis, those with more robust structures--although with checkered pasts--may also be tested (e.g., Turkey, Indonesia, Mexico).
September 30th, 2008: The headline from MTI news now readsHungarian national bank keeps rates at 8.5%; Simor warns on growth.” What happened to “no direct significant impact on Hungary?”

The global financial crisis could have a negative effect on Hungary's economic growth, which is why the government's 3.0pc GDP growth target in the 2009 budget appears a bit exaggerated, Mr. Simor said, answering a question. He added that it was appropriate for the prime minister to instruct the Finance Ministry to calculate with a lower GDP growth figure.
October 8th, 2008: The reliable and independent financial watchdog, PSZAF, reports yet again that there is nothing to fear but fear itself.

BUDAPEST, Oct 8 (Reuters) – “Hungary's banking sector is liquid and not experiencing any signs of a crisis,” Istvan Farkas, the Chairman of financial market regulator PSZAF said on Wednesday.
October 8th, 2008: Don’t worry because all is well, just don’t read the following MTI news brief that was released that same day.

The Budapest Stock Exchange's main BUX index plunged 7.71pc to 16,097.88 in the morning Wednesday as investors grew alarmed about the outlook for credit markets and the global economy.

OTP Bank, the bourse's blue chip most affected by the global financial crisis, plummeted 13.68pc to 4,480 in the morning. Trade of OTP Bank shares -- which was suspended for several minutes in the morning after falling 10pc -- came to HUF 15.0bn, accounting for nearly 70pc of an unusually high total morning turnover of HUF 21.6bn.

October 10th, 2008: Don’t look now, PSZAF, but this looks a lot like a financial crisis.



Hungary’s financial markets watchdog PSZAF has launched an inquiry into a sell-off in OTP Bank’s shares on the Budapest bourse on Thursday, the regulator said on Friday.

OTP’s shares fell over 14% in late trade on Thursday to end at Ft 3,855 ($20.96), its lowest level since May 2004 on market talk that the government planned to nationalize it. OTP, central Europe’s biggest independent bank, and the government both denied the rumor.

Market watchdog PSZÁF said the sudden nature and extent of the price falls triggered its inquiry. “Given the size, timing and the significant (price) difference of the deal in contrast to previous quotes, acting under its legal obligations, the Financial Services Authority has launched a market supervision procedure with immediate effect,” PSZÁF said. (Reuters)

October 17th, 2008: I think we can now safely say that the global financial crisis has had a direct and significant effect on the Hungarian economy.

BUDAPEST (AFP) — Hungary, feeling the effects of the global financial crisis, is the recipient of a five-billion-euro (6.7-billion-dollar) loan from the European Central Bank (ECB).

In an unprecedented move outside the eurozone, the ECB came to Hungary's aid Thursday to help it combat a financial crisis that experts here attribute to panic and speculation.

"There is practically zero chance of a national bankruptcy in Hungary," he added.

But investors have nonetheless made known their concerns. The Budapest stock exchange has shed half its value and the national currency, the forint, has lost more than 10 percent against the euro.

October 17th, 2008: On the same day that Prime Minister Ferenc Gyurcsany attempts to deliver more reassurance, Fitch lowers outlook on Hungary's l-t IDR rating to Negative from Stable.

"The revision of Outlook reflects Fitch's view that shocks from global financial turbulence and the likelihood of recession in the euro area have heightened downside credit risk given Hungary's high external debt stock, wide current account deficit and large external financing requirement," said David Heslam, Director in Fitch's sovereign team.

“The deterioration in global, and particularly European, financial conditions have heightened the risks for economies with large external financing needs and reliance on bank financing. Hungary's gross external debt amounts to 99% of GDP, one of the highest levels in Central and Eastern Europe," Fitch said.

Fitch added that financing of Hungary's current account deficit - which stood at 6.4% of GDP in 2007 (based on revised official statistics) - is “sensitive to strains in international capital and banking markets, with a significant proportion of financing dependent on flows to local banks from their western European parents."

Four domestic banks have announced that they are to restrict growth in foreign currency loans.

“Heightened risk aversion has led to strains in government debt and inter-bank markets and to a weakening of the HUF, which if exacerbated would increase debt servicing requirements and place strains on loan portfolios of the domestic banking system, where foreign currency-denominated loans account for over half of private sector credit."

In addition, the global economic slowdown, and particularly the likelihood of a recession in the euro area - the destination for over half of Hungary's exports - “has weakened an already subdued growth outlook, increasing the challenges facing the government in its attempts to continue to narrow the fiscal deficit."

“At 66% of GDP the government's gross debt remains high relative to the 'BBB' median of 28% and low economic growth will make it difficult for the debt burden to fall, while external markets are an important source of financing, including through substantial non-resident holdings of HUF-denominated debt."
October 18th, 2008: One day later, a national summit is held and there are no smiling faces among the leaders gathered to face what is now openly acknowledged as a severe economic crisis. Here are some ideas that were being tossed around, along with a healthy does of partisan bickering.

BUDAPEST (AFP) — Government and central bank officials outlined measures, including cutting government spending, to mitigate Hungary's risks in the current global financial crisis at a meeting in Budapest Saturday.

Hungarian Prime Minister Ferenc Gyurcsany expressed hope that "ongoing investments would not have to be suspended," during a meeting of some 60 top lawmakers, ministers, central bank chiefs and trade union leaders to work out a short-to-medium term action plan to tackle the financial turmoil.

He also announced modifying the use of European funds "if necessary," while offering no specifics, and ruled out implementing tax cut proposals during the current financial turbulence, a decision supported by business groups.

For his part, central bank governor Andras Simor said Hungary can fend off the effects of the financial crisis only if its economy becomes less vulnerable by "the adoption of the euro, a hike (in competitiveness) by increasing economic growth and a significant decrease of social expenses."

October 18th, 2008: We have heard from the politicians, what about effects of this crisis on the average Hungarian? Here are some excerpts from a New York Times article:
Crisis Comes to Hungary in Loans of Francs and Euros

By NICHOLAS KULISH

‘Average Hungarians are also in trouble. They flocked in droves to banks here in the last several years for once-cheap loans in Swiss francs and euros to buy their cars and houses. Now, they find themselves exposed to rising debt payments.

But Hungarian consumers can do little more than hope their wobbly currency, the forint, stabilizes.

Borrowing in another currency, a mostly foreign concept for middle-class Americans, had become as simple here as walking into the nearest bank branch and applying for credit. The interest rates were lower. There was a risk, but only if the Hungarian currency declined relative to other currencies, forcing borrowers to pay increasing amounts to cover the same monthly bills.

That possibility did not stop nearly 90 percent of consumer borrowers this year from taking out their loans in Swiss francs or euros, according to the central bank.’