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Figure 1: Courtesy of Magyar Nemzeti Bank, Orange Yield Curve is June 2010, Blue is May 2010, Purple is April 2010
Rising yields on government securities in Hungary as well as a slight flattening of the curve have indicated rising risk premiums on Hungarian debt. The ultimate lagging indicator, Moody’s Corp, has put Hungary on outlook negative with potential to drop their debt to junk status after reassessing their rating. With sovereign CDS spreads widening, and an estimated default rate of 21% (still not even in the global top 10 highest default probability), Hungary has become the poster child for the changes needed in Eastern Europe.
If any of the issues facing Hungary as a sovereign entity appear to be merely of moderate credit risk to you, or that you would categorize short term investment in Hungarian interest rates as “prime”, then you probably work for Moody’s. After news of the breakdown in IMF negotiations, Moody’s announced it was putting Hungarian public debt on credit downgrade watch with the potential to move the securities into junk territory. The Hungarian economy has approached expansion, and Magyar Nemzeti Bank has reached a breaking point, where it must raise interest rates to fight rising bond yields, or leave interest rates at recent lows to allow the Hungarian economy to continue its forecasted growth.
Figure 2: Courtesy of Dismal Scientist via National Bank of Hungary
Considering that Hungary is not yet part of the EMU, the possibility of the Forint being inflated (again) into brightly colored toilet paper featuring men with funny hats to “pay” off bondholders is growing more likely.
Hungary appears near the top of the list for most official/formal defaults, at seven, and this time does not appear to be any different. Even though 10 Year maturing debt is still priced below a yield of 8%, Hungary looks like a perfect candidate for a stressful 2010, as some sort of debt restructuring or agreement must be made. However, it seems more likely that Hungary will use the printing press.
A few scenarios are possible in the event Hungary fails to fill the funding gap once provided by the IMF (and IMF induced investors). One possibility is austerity, albeit it is incredibly unlikely.
Figure 3: Courtesy of The International Monetary Fund
Figure 4: Courtesy of the International Monetary Fund
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Hungary: The Little Big Elephant in the Room
