Hungary’s Recanted Mass Conversion

Hungarian shares were off 25 percent for the worst Central Europe MSCI result as ratings agencies reaffirmed the BB+ sovereign grade but highlighted greater banking system fragility with the latest foreign currency mortgage conversion order. Prime Minister Orban reiterated his goal of asserting domestic lender dominance as Austrian parents prepared for additional write-downs with NPLs already at one-fifth the total. The household redenomination cost will top EUR 10 billion but the exchange rate will be close to market as the central bank offers a reserve backup line. Economic growth is set to slow to 2.5 percent on lower EU-aided public investment and Eurozone lethargy, but the currency and bonds could rally indirectly with ECB official buying in an expanded quantitative easing program. With reduced food and energy expense deflation has taken hold despite the forint above 300/euro, and benchmark rate cuts could resume. The 2015 budget is designed within the 3 percent of GDP deficit target, but informal sector collection may be overstated and the government has already retreated on an internet levy after popular uprising. Remaining private pension portfolios may be commandeered as a loyal base at home and abroad is sought for debt placement with the ratio frozen at 75 percent of output.  Polish equities declined less than 10 percent as Q3 growth over 3 percent was the best in 2014 with the zloty firm against the dollar. After a 50 basis point drop the monetary authority paused as agricultural prices continue to recede with the Russian import ban. Public debt has fallen to 50 percent of GDP with private pension takeover cancellation, and the new prime minister will continue state enterprise stake sales for further revenue. She is considered an able steward in advance of 2015 elections, with the opposition Law and Justice Party currently the opinion favorite. Early predictions point to another coalition and euro entry is unlikely to feature on any platform despite Lithuania’s joining in January as the timetable slips to the next decade. In the Czech Republic the MSCI Index is positive on a balanced current account and record trade surplus with the fixed 27/euro rate due to last into 2016. Consumer sentiment has picked up along with inflation possibly nearing the 2 percent goal next year, although political backlash along income and generation divided in the Slovak Republic has raised border concern and reinforced aversion to near-term single-currency adoption there as well.

The three countries were also cited in a December BIS warning on corporate external borrowing through offshore affiliates estimated at $250 billion or half the five-year post-crisis sum through 2013. When the proceeds flow to headquarters they are classified as FDI in official statistics although they may have speculative effects and purpose more like “hot money,” according to the quarterly review. Overseas funding exposure may be 50 percent above the figure captured in banking and debt categories in balance of payments accounts, as groups acting as “surrogate intermediaries” may find their fertility wane.