Hungary’s debt situation has the potential to become extremely ugly, again, now that the government said it won’t push further austerity measures over the weekend. Politics killed fiscal responsibility. The current government has elections to deal with on October 3rd.
Hungary better be careful, else it push itself past the point of no return as shown by the pessimistic scenario below, from Morgan Stanley.
The weekend’s developments in Hungary signal a deterioration in the country’s relations with the IMF. While relations with the IMF over fiscal policy have been tense for a while, as our economist Pasquale Diana has pointed out (see the July 5 CEEMEA Macro Monitor), the suspension of talks is a new development.
We expect relations to remain rocky for a while longer, and Hungarian assets remain vulnerable to headline risks on fiscal policy.
We think that the move higher in EUR/HUF and USD/HUF can continue, while we are sticking to our longs in TRY/HUF and RUB/HUF. The National Bank of Hungary is unlikely to react to HUF weakness by raising rates today. We expect rates to be left on hold at 5.25%. A substantial break above 290 in EUR/HUF could result in intervention in the FX market, though probably wouldn’t reverse the trend of HUF weakness.
So they’re shorting the Hungarian forint.
Moreover, this is a scary precedent for Europe. It shows how austerity doesn’t count until governments actually push it through for a sustained period of time. It’s difficult for governments to even announce austerity measures in Europe, yet even more so to actually implement them.
(Via Morgan Stanley, HUF to stay under pressure, James Lord, 19 July 2010)
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