Hungary’s Household Help Chores

Hungarian shares fell after a Central Europe-beating spurt as the government unveiled medium-term foreign currency mortgage borrower relief and reacquired control of big listed oil company MOL after paying EUR 2 billion for a Russian company stake taken during the 2009 crisis. The homeowner deal will freeze the forint-Swiss franc rate at 180 for several years to aid servicing and lift a foreclosure moratorium although repossession will be confined to just a fraction of the pending portfolio. State financing will be available for family relocation to smaller properties to reduce the overhang and real estate bad asset vehicles could be established by separate legislation. The biggest local bank OTP was lukewarm on the plan as it grapples with a consolidated 15 percent non-performing loan load, while foreign-owned units criticized it as distorting and delaying cleanup as they also bridled at official suggestion of extending special taxes to shrink the budget deficit through mid-decade. Without the levies and commandeering of private pension funds the shortfall would be 7 percent of GDP this year rather than 3 percent, according to statistics. The costs of mortgage assistance and the MOL purchase have yet to be fully delineated as public debt stands at 75 percent of output with a recently-enacted constitutional edict to cap it at 50 percent  through slashing judicial review seen as much as an assertion of ruling party dominance as a commitment to fiscal prudence. It will also introduce a new central bank statute with greater political accountability to redeem a campaign pledge which may spark loosening as rates remain on hold despite above-target 4 percent inflation. Q1 GDP growth was 2.5 percent, double last year’s pace, but industrial production remains sluggish and business and consumer confidence readings are low. Crossover buyers have supported local and external debt prices as CDS spreads have converged with pan-European levels, but erratic policy jitters post-IMF program exit have resurfaced according to auction and issue organizers and participants.

Latvia too, which is approaching graduation and successfully returned to the Eurobond market, has unnerved investors with an inflation spike to 4.5 percent and call for new elections after anti-corruption investigations in parliament encountered roadblocks. Q1 GDP growth slowed to 3.5 percent, and unemployment is still 15 percent. Parex Bank which had to be rescued by the authorities and EBRD has experiencing difficulties reimbursing a syndicated loan as the Finance Ministry has confessed to fiscal consolidation “fatigue” which may tire allocation appetite.