The EU’s Exasperating Excess Exclamations
Hungary and Poland revived their candidacies for medium-term euro entry as the European Commission released them from the excess fiscal deficit procedure delaying consideration and imposing fines at readings over 3 percent of GDP following the original Maastricht criteria. Budapest had triggered possible suspension of cohesion aid last year but the gap came in at 2 percent despite continued Brussels criticism of foreign bank and direct investment taxes indefinitely continued beyond the initial expiration date. A financial transactions levy has since been added raising only half the budgeted amount as the EU prepares a regional counterpart for securities and derivatives activity. Growth has turned positive on inflation under 2 percent, but the debt-GDP and loan-deposit ratios remain stuck at 80 percent and 110 percent respectively. The central bank has been in rate slashing mode under new leadership on persistent overseas bond and currency inflows, although 10-year auctions at record yields below 5 percent have encountered difficulties amid presumed forint overvaluation. Its latest stability report highlighted a spike in non-performing loans to almost 20 percent of the total despite a raft of company and household foreign exchange conversion and repayment rescheduling schemes. Industry losses were $700 million in 2012 with Q1 profit at exchange heavyweight OTP down 10 percent. The government has pointed to a solid reserve position at $35 billion and trade surplus in extending hard currency relief to small business heading into the 2014 election period, which helped lift sentiment to a 2-year high as resort to an IMF backstop remained off the table.
Warsaw in contrast renewed its contingency line as the zloty was off 5 percent against the euro and soft retail sales and construction cut the 2013 growth forecast to 1 percent. Interest rate easing has not pulled equities from their slump despite $5 billion in offerings this year to pace Central Europe and spur multinational banking groups to establish underwriting arms. Private pension funds with $85 billion in assets have been reluctant to re-allocate to stocks and especially the one-quarter of listings from elsewhere in the region in view of traditional guidelines and reductions in state contributions to the system to meet deficit targets. Participants fear Hungary’s nationalization precedent and increased funding pressure as in Portugal where 90 percent of the pool goes to government debt needs through 2015. State-run companies there have already reneged on derivative contracts as the economy has shrunk for ten consecutive quarters and 85 percent of the population seeks renegotiation of the troika arrangement. Both the main banks BCP and BPI must repay immediate post-crisis capital injections as corporate NPLs top 10 percent. Depositors panicked after the Cyprus freeze by shifting cash from accounts to vault safekeeping as they were burned by a widely-seen “playing with fire” approach.
