Moody’s reckons a one-notch cut is most likely, in the next four months — but this depends on whether talks resume. S&P slapped a negative outlook on its ratings of Hungary later on Friday, again noting the IMF soap opera.
In particular, Moody’s has highlighted ongoing Hungarian FX risk:
In a related rating action, Moody’s also placed Hungary’s Baa1 foreign currency bank deposit ceiling on review for possible downgrade. This ceiling reflects the risk that the Hungarian government would freeze foreign currency deposits to conserve scarce foreign currency resources during a crisis…
While Moody’s acknowledges the Hungarian economy’s macroeconomic and fiscal adjustments (as reflected in current account and primary budget surpluses in 2009), the rating agency believes that the country’s economy remains vulnerable because of the high foreign-currency indebtedness of both its private and public sector. Consequently, market confidence in both the government’s fiscal consolidation programme and the value of its currency are considered very important.
Indeed — we’ve noted the mess that’s been made by Hungarian households taking out loans in foreign currency such as the Swiss Franc. As Barclays Capital’s analysts have also pointed out, FX lending imbalances exist throughout the economy:
A risk issue for Hungary has come to the fore again: namely, the potential for a negative feedback loop to develop on the forint exchange rate. The trigger this time around has been the impasse with the IMF, but the underlying problem is domestic balance sheets’ FX exposure…
The risk premium on HUF spot is high, but the fundamental challenges are significant. In addition to the negative feedback loop from the CHF loans, the currency is facing a steadily growing squeeze on foreign funding. This was already evident last Friday with the -190bp 1y HUF-EUR cross-currency basis swap – the widest since March 2009. Trading liquidity in these instruments is low but the pressure to widen continues, in our view, on FX volatility and concerns about local corporate and household balance sheets from the past currency weakness.
That’s a pretty unique currency mess, in short.
But there’s a wider, and older, political economy problem here. Governments don’t like inflicting austerity on voters — even in weak emerging markets. Over to BarCap again:
The “easy” successes of the early phase of the implementation of the hastily put-together programs in Hungary and Romania are now giving way to more traumatic discussions – and reforms. Reform fatigue has set in in those countries, as growth is lacking, fiscal performance is hampered by the lack of growth, and the politicians’ willingness to accept further harsh reforms has diminished; in Hungary, it is the administration that is reluctant to go along, in Romania, it is the opposition. This is the typical EM experience with IMF programs where the magnitude of the needed adjustment is large and distributed over a long period.
Ah, but it’s not just the typical EM experience any more, is it?
Not if European Central Bank president Jean-Claude Trichet has his way, as per his argument for global fiscal tightening in Friday’s FT. Nor for Greece in particular, as BarCap note:
These episodes highlight that investors need to remain mindful that the early successes with fiscal adjustments are no guarantee of their staying power. Unlike Romania, Ukraine and Hungary since late 2009, Greece and most Southern European countries do not face general elections anytime soon. Yet “stabilisation fatigue” is a common phenomenon that sets in a year or two into a tough program, and the outcome of that process is extremely difficult to predict. In short, the recent early success of the Greek courageous efforts should be applauded, but investors would be well advised to keep in perspective that sovereign risks very much remain a reality.
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