Hungary’s Crusty Constitutional Capers

Hungarian shares joined Central Europe core index constituents in the losing column as the Economy Minister assumed central bank leadership with a strident government support stance and constitutional revisions compromising judicial independence as well were re-inserted against US and EU outcry. The forint again fell to the 300/ euro level on telegraphed monetary easing and deployment of foreign exchange reserves recently boosted by an external bond issue for use in a small business currency conversion program modeled after the fixed Swiss franc household mortgage transfer. Prime Minister Orban’s party has only 25 percent approval heading into next year’s elections, and previously backed off on interference when a new IMF program was under negotiation which has since been abandoned. GDP fell 3.5 percent in the last quarter, and credit was down at double that pace as bank taxes were extended indefinitely and the administration affirmed a goal of ending foreign dominance. Tighter fiscal policy should keep the deficit within the 3 percent cap to avoid Brussels possible sanctions, although foreign investors have lightened local bond positions with peripheral Europe redeployment and the absence of an institutional backstop in place following pension fund takeover. Introduction of a new auto model may revive moribund production and municipal debts will be absorbed in a central scheme as the populist platform is burnished for upcoming polls. Poland too cut rates steeply at 50 basis points as the economy turned in its worst post-crisis performance on lagging consumption. The zloty has been off against the euro despite Fitch’s recent positive ratings outlook revision. Public sector debt is near the 55 percent of GDP statutory ceiling and the financial services regulator has relaxed mortgage loan-to-value limits. The Warsaw exchange under new management seeks to promote privatization offerings to raise state revenue and corporate governance as it downplays regional hub ambitions. It had hoped for cross-listings from Prague but the environment there remains muted from continuing investigations into utility heavyweight CEZ and further recession predicted in 2013. Euro-skeptic Vaclav Klaus exited the presidency and was succeeded by a more mainstream politician as currency intervention is still an active option with the benchmark interest rate effectively zero.

In the nearby Balkans bourses in Romania and Serbia had double-digit advances the first two months as they courted Fund and EU partnerships.  In the former local bond yields touched a record low after inclusion in JP Morgan’s index quadrupling the overseas ownership level. The current precautionary standby was stretched to mid-year, and GDP growth may be clearly positive this year on German supply chain exports despite a persistent 4 percent current account gap. Serbian talks commenced with reaffirmation of central bank autonomy and Kosovo concessions but have since been waylaid by a scandal implicating the prime minister which may force fresh elections. The sovereign borrowed commercially last year despite near 15 percent inflation and a 60 percent government debt-GDP ratio with global buyers’ strong liquidity-nourished constitution.