12/12/20: Hungary's risk improvement in peril

 My comment for Euromoney on changes in sovereign risk profile for Hungary: https://www.euromoneycountryrisk.com/article/b1pjjpq2xr2bfy/hungarys-risk-improvement-in-peril-as-it-bites-the-hand-that-feeds-it. 

23/1/16: Poland's Sovereign Risk Troubles

With what appears to be a political-motivated downgrade by the S&P on January, from A to BBB+, with steady outlook, Poland’s sovereign and macro risks have been pushed to the top of news flow. Meanwhile, Moody’s rates Poland A2 (stable) and Fitch A. However, as noted by Euromoney country risk recent assessment, the sovereign risks turmoil that accelerated over the last few weeks has been building up for some time now.

Euromoney Country Risk (ECR) survey shows that by the end of 2015, Poland’s political risk score dropped to 20.06, “the lowest it has been since ECR launched an updated methodology in 2011”. More interestingly, “Poland’s political risk score has been declining – indicating increased risk – since 2011.”

Worse, per ECR: “the drop in Poland’s political score from 20.17 in September to 20.06 in December combined with a fall in its economic risk score from 19.38 to 19.27 over the same period, contributing to a decline in its overall score to 65.62 from 66.93. Poland, which enjoyed a ranking as the 29th safest country in the world in September, dropped four spots in rankings since the yearend survey.

Here is ECR’s summary of scores for Poland, including some recent moves:

It is interesting to see Poland significantly underperforming Slovakia:

Overall, given that both Slovakia and Hungary have, over recent years, adopted a series of reforms that severely undercut effectiveness of institutional checks and balances over the power of the executive, the reaction of ratings agencies and European authorities to Poland following the same route suggests growing concern and nervousness in Europe over all and any national experimentation with populist and/or non-conformist (to EU 'standards') policies.

Not being a fan of the current Polish leadership, I find myself in Poland's corner: in a democratic setting, it is people, not Eurocrats, who should decide on their future institutions.

13/3/15: South Stream Redux: Rejecting the Hungarian-Russian Nuclear Power Deal

A pretty nasty confirmation of the overall hostile approach by the EU toward national autonomy in dealing with the energy markets by the member states came in yesterday. As reported in the FT: http://www.ft.com/cms/s/0/9a6467e2-c8c1-11e4-8617-00144feab7de.html#ixzz3UCYrZfix, the EU has blocked Hungarian deal with Russian Rosatom to develop and supply new nuclear energy facilities at Paks. The EUR12 billion, 1,200 MW facility was to be designed, built and maintained by Rosatom under a contract that is pretty bog-standard around the world and included (also standard) long term exclusive agreement to supply fuel. Paks current output accounts for 40% of total Hungarian electricity generation and the country effectively has no options other than either burn Russian gas, Polish and/or Ukrainian coal or using nuclear. Notably, Polish and/or Ukrainian coal is perhaps the dirtiest generation alternative available to Hungary.

As reported in the FT: "Many EU officials also expressed concerns that Moscow was using energy policy to divide Europe and undermine the bloc’s consensus on sanctions imposed on Russia over its actions in eastern Ukraine."

Which simply means that the EU is now arbitrarily exceeding its own sanctions and is using trade as a conduit for political influence.

It is worth noting that long-term supply agreement for fuel is a necessary part of the agreement that is part-financed (EUR10 billion) by Russian credits. Recovery of these credits is built-into the fuel supply contract.

Another thing worth noting: the EU rejection is not based on the separate concern as to the nature of procurement contract involved. Russia is not liable for the procurement procedures deployed by the Hungarian authorities that might have been in breach of the EU procurement rules.

Net impact: the EU rejection of the contract not on the basis of procurement rules violation, but simply because the EU does not like long term contractual fuel supply arrangements with Russia represents a drastic departure from the EU rhetoric of supporting free trade. Just as in the case with Nord Stream and South Stream pipelines, the EU is currently cartelising energy procurement and development policy (see earlier note here: http://trueeconomics.blogspot.com/2015/02/5215-gazproms-nord-and-south-streams.html). In addition, the EU is now clearly erring on the side of becoming completely unreliable trading partner for Russia, as even the areas not impacted by sanctions are now openly being used as a tool for strengthen sanctions impact.

The twin effect of these exchanges should accelerate Russian pivot East and South away from Europe. This pivot is costly to Russia, but it is also costly to the EU, signalling in the longer run EU's dropping out of the Asia-Pacific, Central Asian and Russian trade and investment blocks. For you may or may not be a fan of Russia or Moscow's policies, but what you cannot escape in all of this is the simple fact: EU has now fully politicised its energy markets. And if so, then who is to say it won;t do so in other markets? The ones that might be important to, say, India or China or Asia Pacific or Latin America? Who is to say that the current trade flows are a permanent and protected feature of the world that EU inhabits? And who is to say that the risk of EU politicising another sector - aviation? transport? industrial machinery? - under the pretence of creating another 'Energy' Union is a risk that the non-EU world should ignore in dealing with Europe?

15/12/2014: BlackRock Institute Survey: EMEA, December 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for EMEA:

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region. The consensus of respondents describe Russia, Croatia and the Ukraine in a recessionary state, the outlook changes to expansion for Croatia over next two quarters." In previous survey, the same three countries were described as likely to remain recessionary.

"At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia and the Ukraine. Globally, respondents remain positive on the global growth cycle with a net 58% of 43 respondents expecting a strengthening world economy over the next 12 months – an 28% increase from the net 30% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: Red dot represents Czech Republic, Kazakhstan, Romania, Israel, Poland, Slovenia and Slovakia

Previous report was covered here: http://trueeconomics.blogspot.ie/2014/10/23102014-blackrock-institute-survey.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

23/10/2014: BlackRock Institute Survey: EMEA, October 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for EMEA:

"The consensus of respondents describe Russia, Croatia, Egypt and the Ukraine in a recessionary state, with an even split of economists gauging Hungary and Turkey to be in a recessionary or contraction phase. Over the next two quarters, the consensus shifts toward expansion for Egypt and Turkey"

Red dot represents Czech Republic, Kazakhstan, Israel, Poland, Slovenia and Slovakia

"At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia and the Ukraine."

Global: "respondents remain positive on the global growth cycle with a net 43% of 37 respondents expecting a strengthening world economy over the next 12 months – an 7% decrease from the net 50% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy"

Previous month results are here: http://trueeconomics.blogspot.ie/2014/10/6102014-blackrock-institute-survey-emea.html


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

6/10/2014: BlackRock Institute Survey: EMEA, September 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe (covered here: http://trueeconomics.blogspot.ie/2014/10/6102014-blackrock-institute-survey-n.html). Here are the survey results for EMEA:

"The consensus of respondents describe South Africa, Croatia, Slovenia, Russia and the Ukraine in a recessionary state, with an even split of economists gauging Romania to be in a recessionary or contraction phase. Over the next two quarters, the consensus shifts toward expansion for Russia and South Africa. At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Turkey, Slovenia, Hungary and the Ukraine."

Global: "respondents remain positive on the global growth cycle with a net 50% of 36 respondents expecting a strengthening world economy over the next 12 months – an 9% decrease from the net 59% figure last month. [There was also a net decrease from 85% two months ago]. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."


Two charts to illustrate:

Previous month results are here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-emea.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

23/8/2014: BlackRock Institute Survey: EMEA, August 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe (covered here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-n.html). Here are the survey results for EMEA:

"…this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region. The consensus of respondents describe Croatia and the Ukraine in a recessionary state, with an even split of economists gauging Russia, Hungary and Turkey to be in a recessionary or contraction phase."

6 months out: "Over the next two quarters, the consensus shifts toward expansion for Russia and Hungary and an even split between expansion or recession for Turkey."

12 month out: "At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia, Hungary, Turkey and the Ukraine."

Global: "Globally, respondents remain positive on the global growth cycle with a net 59% of 32 respondents expecting a strengthening world economy over the next 12 months – an 26% decrease from the net 85% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Two charts to illustrate:

Note: Red dot represents Czech Republic, Kazakhstan, Romania, Israel, Egypt, Poland, Slovenia and Slovakia.

Previous month results are here: http://trueeconomics.blogspot.ie/2014/07/1172014-blackrock-institute-survey-emea.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

16/7/2014: BlackRock Institute Survey: N. America & W. Europe, July 2014

In an earlier post I covered EMEA results from the BlackRock Investment Institute latest Economic Cycle Survey. Here, a quick snapshot of results for North America and Western Europe.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 81% of 97 economists expecting the world economy will get stronger over the next year, compared to net 67% figure in last month’s report."

"The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

"Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Greece and France to be in a recessionary state, with the even split between contraction or recession for Belgium. Over the next 6 months, the consensus shifts toward expansion for Greece and France. Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

"At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or stay the same with the exception of Finland which is expected to stay the same."

See June data for comparatives here: http://trueeconomics.blogspot.ie/2014/06/1462014-blackrock-institute-survey-n.html - very interesting changes in the first chart above can be traced.

Ireland top question analysis:

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

11/7/2014: BlackRock Institute Survey: EMEA, July 2014

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.

Per BII: "With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region.

The consensus of respondents describe Russia, the Ukraine and Croatia be in a recessionary state, with an even  split of economists gauging Kazakhstan and South Africa to be a in a recessionary or contraction. Over the next two quarters, the consensus shifts toward expansion for Kazakhstan and South Africa.

Note: Red dot represents Czech Republic, Hungary, Romania, Israel, Slovenia, Poland and Slovakia

At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia, Kazakhstan, Turkey, Hungary and the Ukraine.

Globally, respondents remain positive on the global growth cycle with a net 85% of 34 respondents expecting a  strengthening world economy over the next 12 months – an 14% increase from the net 71% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

14/6/2014: BlackRock Institute Survey: EMEA, June 2014

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.

Per BI: "With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region.

The consensus of respondents describe Russia, South Africa, Slovenia, Croatia, and the Ukraine to be in a recessionary state, with an even split of economists gauging Kazakhstan to be a in a recessionary or contraction.

Note: Red dot represents Czech Republic, Hungary, Romania, Israel, Egypt, Poland and Slovakia

Over the next two quarters, the consensus shifts toward expansion for only Kazakhstan.

At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Israel, Kazakhstan, Slovenia, South Africa and the Ukraine.

Globally, respondents remain positive on the global growth cycle with a net 71% of 41 respondents expecting a strengthening world economy over the next 12 months – an 7% decrease from the net 78% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

6/5/2014: BlackRock Institute Survey: EMEA, April

BlackRock Institute published their April 2014 survey of economic conditions in EMEA region. Here are some takeaways:

1. "The consensus of respondents describe Russia, Slovenia, Croatia, Turkey and Turkey to be in a recessionary state, with an even split of economists gauging Kazakhstan and Egypt to be a in a recessionary or contraction."
2. "Over the next two quarters, the consensus shifts toward expansion for only Egypt."
3. "At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Slovenia, Turkey, Russia and the Ukraine."

Russian economy specifics:

• "How do you think Russia's economy will develop over the next 12 months?" 72% of respondents expect economy to become weaker or a lot weaker
• "At this time, in which phase of the economic cycle would you say Russia's economy is?" 100% of respondents estimate that the Russian economy is currently in a recession.
• "Over the next 6 months, in which phase of the economic cycle would you say Russia's economy will be?" 86% of respondents expect Russian economy to remain in a recession.
• 57% of respondents estimate that currently Russian economy is operating with a positive or zero output gap.
• 71% of respondents estimate that currently Russian economy operates at above trend inflation that is increasing.

"Globally, respondents remain positive on the global growth cycle with a net 78% of 40 respondents expecting a  strengthening world economy over the next 12 months – an 9% decrease from the net 87% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: Red dot represents South Africa, Czech Republic, Hungary, Romania, Israel, Poland and Slovakia.

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts

8/2/2014: BlackRock Institute Survey: EMEA, February

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region. Emphasis is mine.

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region.

"The consensus of respondents describe Slovenia, Croatia, Turkey and, the Ukraine to be in a recessionary state, with an even split of economists gauging South Africa to be in expansion or contraction. Over the next two quarters, the consensus shifts toward expansion for South Africa and the Ukraine."

Note: Red dot represents Czech Republic, Kazakhstan, Hungary, Romania, Poland, Slovakia

And out 12 months: "At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Turkey."

"Globally, respondents remain positive on the global growth cycle with a net 88% of 43 respondents expecting a strengthening world economy over the next 12 months – an 6% increase from the net 82% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/1/2014: BlackRock Institute Survey: EMEA, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region. Emphasis is mine.

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region."

The consensus of respondents describe Slovenia, Croatia, Egypt and, the Ukraine to be in a recessionary state and expected to remain so over the next 6 months except for Croatia, where there is an even split between expansion and contraction.

Note: Red dot represents Czech Republic, Kazakhstan, Hungary, Romania, Israel, Poland and Slovakia

At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen with the exception of Turkey. So Russia is improving 6mo forward improvement in outlook on current phase (see above chart), but Ukraine is expected to remain in a late cycle recession. Out at 12mo horizon, Ukraine is still expected to underperform Russia.

Note Slovenia's performance expectations. It is worth noting that the IMF is releasing Slovenia's economy's assessment, so it would be interesting to take a comparative look at the Fund expectations.


Globally, respondents to the EMEA survey "remain positive on the global growth cycle with a net 82% of 61 respondents expecting a strengthening world economy over the next 12 months – an 8% increase from the net 75% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

12/12/2013: BlackRock Institute Survey: EMEA, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.


"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region. The consensus of respondents describe Slovenia, the Ukraine, Croatia, Egypt and Russia currently to be in a recessionary state.

Forward expectations:

• Over the next 6 months, "the consensus shifts toward expansion for Russia and Egypt and an even split between expansion and contraction for Croatia."
• "At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen or remain the same, with the exception of Slovenia and Ukraine."

Global economy view from the region: "Globally, respondents remain positive on the global growth cycle, with a net 74% of 58 respondents expecting a strengthening world economy over the next 12 months, unchanged from last month’s report. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy"

Note: Red dot represents Slovakia, Poland, Romania, Israel, Kazakhstan, and South Africa

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

5/11/2013: BlackRock Institute survey: EMEA October 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.
 A note on latest survey results for North America & Western Europe is available here.

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region."

"The consensus of respondents describe Slovenia, the Ukraine, Croatia and Russia currently to be in a recessionary state, with an even split of economists gauging Egypt to be in expansion or contraction. Over the next 2 quarters, the consensus shifts toward expansion for Russia, Croatia and Egypt and an even split between expansion and contraction for the Ukraine."

"At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen or remain the same, with the exception of Russia." Russian sentiment has deteriorated significantly in recent months.

"Globally, respondents remain positive on the global growth cycle, with a net 73% of 57 respondents expecting a strengthening world economy over the next 12 months – a 13% decrease from the net of 86% figure in last month. The consensus of economists project a shift from early cycle to mid-cycle expansion over the next 6 months."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

Note: Red dot represents Slovakia, Poland, Israel, Kazakhstan, and South Africa. 

6/9/2013: BlackRock Institute survey: EMEA: August 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region.
 Note: my note on survey results for North America & Western Europe is available here.

Per summary: "... this month’s EMEA Economic Cycle Survey presented a generally bullish outlook for the region. 

The consensus of respondents describe Slovenia, the Ukraine, Croatia, Egypt and Russia currently to be in a recessionary state, with an even split of economists gauging Slovakia to be in expansion or contraction. Over the next 2 quarters, all these countries are expected to stay in a recessionary state except Russia, Slovakia and Croatia. 

At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen or remain the same, with the exception of the Ukraine and Turkey."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

Here are two summary charts:

20/2/2013: Hungary's 'Return' to Bond Markets

Week ago, Friday, Hungary was downgrade to junk. This Tuesday, despite its newly-minted junk bond status from all three core agencies (Ba1/BB/BB+) Hungary went to the market with a plan to raise USD3bn worth of US Dollar-denominated bonds. 

Now, unlike Ireland, Hungary is NOT in the 'best-of-class' league in Europe when it comes to compliance with the Troika demands and in general. After all, Hungary went on to aggressively interfere with its Central Bank independence, broke off negotiations with the IMF on second 'rescue' package back in November 2012, and basically replaced the Governor of the Central Bank with dovish Monetary Council. The country economy is still in a tailspin based on IMF figures*, although its fiscal performance, external balance and unemployment are healthier than those of the 'best-in-class' country - Ireland: 

-- Hungarian GDP is estimated by the IMF to have fallen by -1.021% in 2012 (against Ireland's estimated increase of +0.353%), with 2013 forecast for a rise in Hungarian GDP of just 0.797% in real terms (Ireland's same period forecast is for a rise of 1.394%).

-- Hungary's unemployment rate is barely budging off the crisis high (11.243% in 2010 to 10.925% in 2012). Ireland's unemployment rate is at the crisis period high with 2012 estimate at 14.7-14.8% and expected to decline marginally to 14.41% in 2014.

-- Hungary's General Government Revenues are shrinking faster than the economy. In 2011, Hungary's Government collected 52.864% of GDP in revenues, which has fallen to 45.787 in 2012 and is expected to shrink to 45.054% in 2013. In the mean time, Ireland's Government Revenues are marginally up from 34.118% in 2011 to expected 34.542% in 2013.

-- General Government Total Expenditure in Hungary is slowly inching up: from 48.672% in 2011 to forecast 48.761% in 2013, against Ireland's contraction from 46.869% in 2011 to 42.065% projected for 2013.

-- General government net lending/borrowing in Hungary stood at a deficit of -2.909% of GDP in 2012 and is forecast to rise to -3.707% in 2013. This compares with the completely abysmal Irish performance at 8.301% GDP in 2012 to 7.523% in 2013 forecast.

-- Hungary's primary deficits are expected to be less than 1/2 of those of Ireland in 2013.

-- Hungary's Government debt is sitting at 74.2% of GDP forecast for 2013, down from 80.6% in 2011, while Ireland's debt is up from 106.5% in 2011 to 119.3% projected for 2013.

-- The Government is aiming to repay the IMF and EU of €3.65bn and €2.31bn in 2013, against Ireland's nil repayments.

-- Hungary's current account balances have been in excess of that for Ireland since 2009, although 2013 forecast is for the current account surplus of 2.69% in Hungary vs 2.71% in Ireland.

*Note: I am using WEO data for the comparatives, instead of individual countries assessments, so some of the data cited is slightly off the latests projections, although the actual comparatives are hardly off by much

In other words, Hungary is clearly more of a sovereign policy, economic environment and monetary policy risk to the investors than Ireland. And despite this, Hungarian Government 10-year bonds have fallen in terms of yields from 5.8% in August 2012 to around 4.7% currently.

And last Tuesday, Hungary has managed to place USD3.25billion worth of new 5- and 10-year bonds with the cover ratio at 12.5-to-3.25. Overall, Hungary had offers for USD5.5bn worth of 4.25% 2018 bond with USD1.25bn allocated, these were priced at 335bps over US Treasuries and 320bps over mid-swap bang on with where the 10-years (2011s) were traded in the secondary market. Last time it sold 10-year bonds back in 2011, these were priced at coupon of 6.375% or full 100bps above the current deal. It also booked USD7 billion book for 5.375% 2023 bond with USD2bn allocated, priced at 345bps over US Treasuries and 336bps over mid-swaps.

Hungarian Government planned to raise some USD4bn worth of bonds in 2013 in total and is now 81% at its target for the year. Geographic allocation of the placement was even more encouraging: US investors took 55% of the 10-year paper, UK and Europe investors took 21% each. Funds took 81%, hedge funds took 9% and banks and retail investors only 5%. The 5-year allocation was similarly spread.

All of this suggests that the markets have little interest, currently, in the underlying risk fundamentals. Instead, pretty much anything offering a yield above the G7 average is simply seen as a target worthy of consideration. While Governments are quick to show up at the sales announcements with proclamations of their policies successes, the reality of the market awash in liquidity and nothing to chase in terms of yield means that investors are rushing into the issues pushed through by the economies that hardly in rude health today or can be expected to return to such a state any time soon. 

20/8/2012: Hungary - a country that can't?..

An interesting blogpost by Professor Steve Hanke on Hungarian economy's adventures in the crisis land.

Here's another look at Hungary (all data is via IMF WEO). Green boxes show ranges of values required for Hungary to effectively converge in economic development with top EU12 states and those that are consistent with long-term sustainability of public finances.

Fron the first chart it is clear that Hungary did well during the period from 1997 through 2006 in terms of real economic growth, but severely underperformed in terms of external balances. In fact, for the period 1995-2017 (incorporating IMF latest forecasts) Hungary operates within its means (in terms of current account balance) in only 4 years.

While current account deficit remained steady at worse than -7.0% of GDP in 1998-2008, little of this relates to investment supports. In fact, current account deficits vastly exceed the portion of the economic investment not financed by savings.

Per chart above, it is also clear that Hungarian investment has declined precipitously, as a share of GDP, from the peak 27.65% in 1998 to 23.54% in 2008 and fell to around 18% from 2012 on. Meanwhile, savings too trended down over the period 1995 through 2017. The economy is becoming less and less capable of generating investment-driven growth (and that is ignoring the issues of credit supply in the banking system etc).

Hungary's Government debt was relatively benign, compared to many european counterparts during the period of 1997-2006. However, the metric used (debt around 60% of GDP) ignores the reality of an economy that is still in catching up with the more advanced European states (including some post-transition economies, such as Czech Republic and Slovenia) in terms of income per capita and other macroeconomic parameters. Such catching up can only be aided by lower debt to GDP ratios and more investment.

In line with external deficits highlighted above, Hungary has run some extremely severe imbalances on both structural government deficit and net government borrowing (ordinary deficit) sides, as shown in the chart below. In terms of government deficit, Hungary was in the red, on average by 3.48% of GDP in the period pre-accession to the EU. Between 2001 and 2007 the deficit averaged massive 6.92% annually, declining to 2.3% of GDP in 2008-2012. The benign level of current deficit (2012 expected deficit of 3% of GDP comes on top of surplus of 3.96% in 2011) is only highlighting the fact that short-term corrections are no substitute for longer-term prudence. Between 1995 and 2012, Hungarian Government was operating within 3% deficit criterion for only 2 years.

Cumulated, the twin current and government deficits from 2000 on through 2012 are severe:

All of this suggests that Hungary suffers (at 80.45% of GDP in 2011) from a classic debt overhang problem exacerbated by the long-term poor performing fiscal deficits and current account dynamics. That these effects should be felt even at the level of debt traditionally considered to be relatively benign (Hungary's 5-year average Government debt through 2012 stands at 78% of GDP compared to 62% for the 5 year period between 2003 and 2007) is probably best explained by the country relatively lower ability to sustain even these levels of debt.

Eastern European Currencies & Soros

Per Financial Times report (here): CBs of Eastern Europe are issuing coordinated statements calling recent currency weakness unjustified and raising the possibility of intervention on foreign exchange markets. Take this, in line with George Soros' weekend cry to arms for state-led socialism to replace liberal financial markets regulation (as if such really does exist in any developed country today). Recall the classic lesson taught by Soros in the case of British experience with ERM: Central Banks interventions in Forex markets impoverish taxpayers and enrich George Soros.

So what should the strategy be for anyone with a position in Poland’s zloty, Hungary’s forint, the Czech koruna and the Romania’s leu? These currencies rallied after the statement. Three scenarios are thus possible:
Scenario 1: CBs mount a spirited defense driving currency valuations up for ca 1 month before all currencies come down again on the back of excessive fiscal deficits, private economy contractions and implosions of housing bubbles (in some countries), with private banking continuous deterioration (in other). Foreign banks and domestic banks use the opportunity to aggressively expatriate capital at higher currency valuations, driving down demand for domestic paper. Shorting now is a 'win' proposition.
Scenario 2: CBs do not mount a serious/credible defense and instead preside over further devaluation to bring currencies down to longer term recessionary equilibrium levels. Foreign banks, suffering their own crisis at home continue to expatriate capital, further contributing to devaluation pressures. Shorting now is a 'win' proposition.
Scenario 3: George Soros gets his wish and EU-styled over-regulation reigns supreme over the Forex markets in which case we get stiffening of the ERM mechanism and a coordinated effort on behalf of the EU to drive down the Euro over a period of time. No Eastern European country would enter an ERM band at a peril to its exporters, so Poland (and potentially at a later date - Hungary, Romania and Czech) will devalue their currencies before the ERM accession to boost the chances of economic recovery. Shorting now is a 'win' proposition.

As with the 1990s ERM crisis, this is a one-way bet assuming you have a stomach for being open in the Eastern European currencies in the first place. (All usual caveats apply of course, plus a disclosure: I hold no open position in the above currencies.)