Hugary Currency

Admin | February 06, 2012 | Comments Off

Hugary Currency

Hugary Currency

HUNGARY’S economy these days is not limping, but that doesn’t mean it is very stable either. Like other European nations today, it feels the global economic crunch, the reason why the government needs around 15 billion euros ($27 billion) in credit line from international agencies, Mihaly Varga, secretary of state who heads the country’s Premier’s office, was quoted as saying, Saturday.

The country is seeking financial support from the European Union and the International Monetary Fund to convince creditors and investors that Hungary has financing even if the government is detached from debt markets this year.

The forint, Hungary’s currency, fell to record lows versus the euro just a month earlier and the nation’s bond yields climbed more than 10 percent on worries that in the midst of the financial turmoil hounding much of Europe Hungary may fall short in financing the debt load of central Europe compared to its total economic output.

Varga said that Hungary expected to strike up an agreement soon regarding a credit line that the country could use if the debt crisis of Europe further escalates.

 

Cohesion fund

According to Varga during an exclusive interview with the newspaper Magyar Hirlap, an immediate deal will be healthy for both parties, so an agreement could be crafted in a month or so. Varga added that the volume of safety measures could be anywhere between 15-20 billion euros.

Hungary repeatedly sent jitters to investors last year with unorthodox economic rulings. The government has also worried the European Commission with a host of policies that include a bill implemented by the central bank that the EC said constrained the bank’s sovereignty.

Markets in Hungary have temporarily bounced back courtesy of pledges by government to help alleviate its financial burden and establish the credit line. The European Union said it will cut off important cohesion funds that it disburses to the Hungarian government unless the nation initiates measures to show that it has the capability to minimize its deficit to safe levels.

But a setback in the country’s economy will make budget cuts very difficult. Hungary is expecting a 0.6 economic improvement this year while the European Bank for Reconstruction and Development and IMF predicts a 0.4 and 1.6 growth, respectively.

 

Brief cut

Meanwhile, the government-run Gazprom of Russia, one of the country’s biggest natural gas firms, admitted for the first time on Saturday that it had temporarily limited supplies of gas to Europe.

Andrei Kruglov, deputy chief of Gazprom, reported to Russia’s Premier Vladimir Putin that the reductions lasted for many days and hit up to ten percent, but gas supplies are now back to normal.

However, key French and Austrian officials reported reductions of as much as 31 percent, and Italy reported that supplies dipped by about 25 percent on Thursday.

On Friday, the Gas Coordination Committee of the European Commission was put on alert, but emphasized the situation is still not very critical as countries have vowed to provide assistance if needed.

 

Hungary is paying through the nose to borrow even short-term funding, and the cost of insuring Hungarian debt via credit default swaps hit a new record, at 655 basis points according to Bloomberg. It paid yields of 7.67% to borrow for a three-month term and raise 45 billion forint ($190 million) yesterday.

Domestic turbulence is complicating matters, with protestors taking to the street to protest the government's new constitution (which includes that controversial central bank law). According to the BBC, protests are focusing on three major issues:

  • A clause that defends the "intellectual and spiritual unity of the nation," which opponents argue could result in repression of intellectual freedoms

  • Inclusion of social issues like the right of the unborn child and the definition of marriage as a union between a man and a woman

  • Changes to the electoral system which could empower the leading Fidesz party at the expense of the opposition

Popular support for the Fidesz party hit 18% in a December opinion poll cited by the BBC, although it still leads other parties.

If the Hungarian government were unable to pay its bills, it could wreck the Austrian banking system, which has an estimated $226 billion in exposure to Eastern Europe and €1.14 trillion ($1.6 trillion) of assets held in the region.

10-year yields on Austrian government bonds—and indicator of stress on the country—are moving sharply higher this morning. They rose to 3.20%, the highest level since before a central bank stilled their rise earlier in the year.