Economy
IMF/EU bailout deal for Hungary by April would be a "miracle" - SocGen
Gov’t may be playing a trick
Last week, SocGen’s analysts met a number of their regular contacts at various institutions in Hungary, this time with a large group of international investors.
“The perceived deterioration of the situation in Hungary has clearly put the country on the map for many accounts, most of which were trying to gauge whether an improvement could soon be on the horizon and whether current levels actually offered an attractive entry opportunity. We do not believe that it is the case for now," the analysts have warned.
On a more positive note, they reminded that the coming weeks will bring “much clarity" as to whether an EU/IMF aid package is at all possible. On the negative side, they are “far from certain as to whether the recent more conciliatory comments from the Hungarian governments towards the EU commission and the IMF are nothing more than yet another tactic to calm markets down."
Budapest Anecdotes
The analysts started this note by an anecdote that, in their view, seems to be summarising the current situation in Hungary well. They have pieced together this anecdote from various contacts.
“The exact timing might not be exact but the message stands. Following the adoption of a number of controversial laws on December 30th, central bank (NBH) Governor Simor was eager to meet with Fidesz leaders to discuss the resulting impact on HUF assets. His request was not initially met, we have gathered. The first week of January of 2012 started very poorly for HUF assets and EUR/HUF traded all the way up to 324.00 EUR/HUF. Amidst this price action, Fidesz leaders agreed to finally sit down with Governor Simor."
“The meeting coincided with talks amongst some parties in the public and private sector that bank deposits were under pressure. During the meeting, Mr Simor reportedly discussed the increasing concern about the outlook for HUF assets as well the distress in the bond markets and in FX. In response to that, Fidesz leaders reassured the NBH governor by stating that more conciliatory remarks would be made towards the EU and IMF. These would calm the markets down. These comments were subsequently delivered and markets indeed calmed down from the distressed level of 325ish EUR/HUF all the way to the low 300's."
“These comments came together with the announcement that PM Orban would nominate a team of advisors and that this team would travel to Washington, Brussels and Frankfurt to start negotiation on a possible aid package."
“Sadly, no negotiations on an aid package are under way and won't be until the government has agreed to changes to the recently adopted laws. On this subject more bad news will emerge over the coming few days," the analysts concluded.EU, IMF to want a lot from Hungary
SocGen emphasised that both institutions, namely the European Commission and the IMF talk in unison on the current matters. The analysts noted that both institutions have already made it clear to the Hungarian government that "the ball is in their court" and that no negotiations are taking place now and will not be initiated before the following preconditions are met.
“The preconditions are changes to the recently voted Revised Central Bank Law and the Financial Stability Law to make them EU compliant."To clarify the position of the EU executive on the above matter: tomorrow (17 January), the Hungarian government is likely to receive a letter. This, SocGen’s analysts believe, will state that the above laws are "non compliant" under EU rules.
“This letter will clearly answer some of the market uncertainty as to whether the EU could accept the current laws as they stand. This is where the first hurdle stands."
Gov’t should respond quickly
The analysts would expect the government to quickly react to this letter.
“In an "ideal" environment where the Fidesz government genuinely wants to “work" with the EU and the IMF, one should expect a speedy reply, initially via a press conference, stipulating that it acknowledges the letter and stand ready to modify the above laws according to EU requests. The government would then write to the EU Commission accordingly and call for a special/emergency parliamentary session to change the above laws. Talks could then resume between the government and the two parties and the market could breathe a sigh of relief."
The analysts warned, however, that the cabinet has been “so unpredictable so far" that they are far from certain that this is the stance the Fidesz government will take.
Given how clearly Brussels declared that recent laws need to be modified to be compliant under EU rules, the analysts do not believe that without such changes the negotiations will begin.
Their concern is that the Fidesz government “will be of the belief that there is room for manoeuvre and may take a view along those lines."
The IMF and the EU would not receive this well, and market players would definitely not like it, they added.
Drastic conditions likely
On another point, SocGen’s analysts believe that the EU Commission is not requesting a withdrawal of these laws but rather “some changes to make them compliant i.e. the steps required to enter talks and negotiations are not that drastic, should the government be fully committed to seeking an aid package with the above institutions."
“However, we are of the belief that the conditions attached to any aid will be drastic and will touch on many recent laws and measures introduced by the government including the judiciary laws, the flat tax system, budgetary measures, the banking sector and many others. The background for this drastic condition package seems to stand from the fact that the EU and IMF are uneasy with the (short-term) nature of budgetary measures designed to reach deficit targets to the detriment of growth."
Bailout deal by end-March would be a mircacle
On the timing of any aid the market is of the thinking that an aid package could be in place by March, SocGen’s analysts noted.
A few analysts in a Portfolio.hu poll conducted in early 2012 said the IMF/EU could grant Hungary a credit facility already this month, but almost half of the respondents expected the deal only in March. It is noteworthy and reflects a high degree of uncertainty that nearly 30% of the analysts believe aid talks will drag out until June or July.
SocGen’s "own" poll based on its clients travelling with them in Hungary attaches a 75 to 80% probability of such an outcome, i.e. a deal by end-March.
“We believe that a deal reached by March would be a quasi “miracle" and would require that all goes very smoothly and efficiently on both sides of the negotiating table."
SocGen’s sources stipulate that the best case for an aid package would be “50 to 60 days from any changes in Revised Central Bank and Stability Laws being adopted by the parliament. More likely though a time-frame of 3 to 4, maybe even 5 months, and this is assuming that the Hungarian government does not try negotiating the terms of the revised Central bank and Stability laws."
MPC divided, but...
Having met “many members" of the central bank (NBH), SocGen’s analysts came to the following conclusion. While the Monetary Council is “heavily divided" at the moment, there is one factor that unites the NBH, which is “the recognition that it is absolutely essential for the central bank to maintain market stability while any negotiations between the government and the EU/IMF are still under way."
“One thing that is quite clear in our view: a speedy return to 325.00 for EUR/HUF would unite the council in calling in calling for an emergency meeting and a forceful response would then be delivered," the analysts said. They would then expect a hike in the region of +200bp to +300bp.Emergency rate meeting is a clear risk
According to all of SocGen’s contacts, the NBH is still working under the scenario of an EU/IMF deal being put together.
“There is clearly a risk that the NBH could call an emergency rate meeting and hike aggressively even as talks are ongoing. This would require a speedy return of EUR/HUF to the 325.00 mark again. Growing frustration on the part of investors about the pace of EU/IMF talks could have HUF assets come under extremely severe pressure again. This is a genuine risk base on the information we have gathered in Budapest about the possible timing of any EU/IMF aid."
If Hungary failed to secure an aid package, the NBH would rather not adopt direct FX intervention but rather “use other tools such as rate hikes and quiet intervention."
“The NBH could also decide to intervene in the short end of the bond market, buying T-bills and short-dated HGB's as it did in late 2008. We have the feeling that the NBH would only reluctantly use direct fixed-income purchases."
“Based on all the information that we have gathered, we fear that the +80bp hikes priced in over 3 to 6 months are the "friendliest outcome" to be expected. A slow process to reach an EU/IMF deal could easily send EUR/HUF back to 325.00 where we feel the risk of an emergency hike will be very much present and it would be an aggressive one."
Strategy implications: Buy EUR/HUF in this dip
SocGen’s analysts and strategists believe that “the short-term Hungary-specific risks are not priced in by the market, especially in the context of a global markets backdrop that also remains challenging in the wake of the recent wave of rating downgrades in the EU. We therefore like to buy EUR-HUF at the current level."
“A number of risks arise with this trade. Firstly a long position in EUR/HUF hinges on a continued challenging global market environment. In addition, this trade would work better if our view that any EU/IMF negations will be length and challenging proves warranted."
Others are more upbeat
Other investment banks addressed the Hungarian situation over the past few days. Analysts at Morgan Stanley, for instance, believe a bailout deal with the IMF/EU will be reached before the end of the first quarter. The Prime Minister’s more conciliatory remarks have reduced the likelihood that more extreme negative scenarios will materialise, they said in a recent research note.
Last week, SocGen’s analysts met a number of their regular contacts at various institutions in Hungary, this time with a large group of international investors.
“The perceived deterioration of the situation in Hungary has clearly put the country on the map for many accounts, most of which were trying to gauge whether an improvement could soon be on the horizon and whether current levels actually offered an attractive entry opportunity. We do not believe that it is the case for now," the analysts have warned.
On a more positive note, they reminded that the coming weeks will bring “much clarity" as to whether an EU/IMF aid package is at all possible. On the negative side, they are “far from certain as to whether the recent more conciliatory comments from the Hungarian governments towards the EU commission and the IMF are nothing more than yet another tactic to calm markets down."
Budapest Anecdotes
The analysts started this note by an anecdote that, in their view, seems to be summarising the current situation in Hungary well. They have pieced together this anecdote from various contacts.
“The exact timing might not be exact but the message stands. Following the adoption of a number of controversial laws on December 30th, central bank (NBH) Governor Simor was eager to meet with Fidesz leaders to discuss the resulting impact on HUF assets. His request was not initially met, we have gathered. The first week of January of 2012 started very poorly for HUF assets and EUR/HUF traded all the way up to 324.00 EUR/HUF. Amidst this price action, Fidesz leaders agreed to finally sit down with Governor Simor."
“The meeting coincided with talks amongst some parties in the public and private sector that bank deposits were under pressure. During the meeting, Mr Simor reportedly discussed the increasing concern about the outlook for HUF assets as well the distress in the bond markets and in FX. In response to that, Fidesz leaders reassured the NBH governor by stating that more conciliatory remarks would be made towards the EU and IMF. These would calm the markets down. These comments were subsequently delivered and markets indeed calmed down from the distressed level of 325ish EUR/HUF all the way to the low 300's."
“These comments came together with the announcement that PM Orban would nominate a team of advisors and that this team would travel to Washington, Brussels and Frankfurt to start negotiation on a possible aid package."
“Sadly, no negotiations on an aid package are under way and won't be until the government has agreed to changes to the recently adopted laws. On this subject more bad news will emerge over the coming few days," the analysts concluded.EU, IMF to want a lot from Hungary
SocGen emphasised that both institutions, namely the European Commission and the IMF talk in unison on the current matters. The analysts noted that both institutions have already made it clear to the Hungarian government that "the ball is in their court" and that no negotiations are taking place now and will not be initiated before the following preconditions are met.
“The preconditions are changes to the recently voted Revised Central Bank Law and the Financial Stability Law to make them EU compliant."To clarify the position of the EU executive on the above matter: tomorrow (17 January), the Hungarian government is likely to receive a letter. This, SocGen’s analysts believe, will state that the above laws are "non compliant" under EU rules.
“This letter will clearly answer some of the market uncertainty as to whether the EU could accept the current laws as they stand. This is where the first hurdle stands."
Gov’t should respond quickly
The analysts would expect the government to quickly react to this letter.
“In an "ideal" environment where the Fidesz government genuinely wants to “work" with the EU and the IMF, one should expect a speedy reply, initially via a press conference, stipulating that it acknowledges the letter and stand ready to modify the above laws according to EU requests. The government would then write to the EU Commission accordingly and call for a special/emergency parliamentary session to change the above laws. Talks could then resume between the government and the two parties and the market could breathe a sigh of relief."
The analysts warned, however, that the cabinet has been “so unpredictable so far" that they are far from certain that this is the stance the Fidesz government will take.
Given how clearly Brussels declared that recent laws need to be modified to be compliant under EU rules, the analysts do not believe that without such changes the negotiations will begin.
Their concern is that the Fidesz government “will be of the belief that there is room for manoeuvre and may take a view along those lines."
The IMF and the EU would not receive this well, and market players would definitely not like it, they added.
Drastic conditions likely
On another point, SocGen’s analysts believe that the EU Commission is not requesting a withdrawal of these laws but rather “some changes to make them compliant i.e. the steps required to enter talks and negotiations are not that drastic, should the government be fully committed to seeking an aid package with the above institutions."
“However, we are of the belief that the conditions attached to any aid will be drastic and will touch on many recent laws and measures introduced by the government including the judiciary laws, the flat tax system, budgetary measures, the banking sector and many others. The background for this drastic condition package seems to stand from the fact that the EU and IMF are uneasy with the (short-term) nature of budgetary measures designed to reach deficit targets to the detriment of growth."
A number of crucial dates for Hungary (in SocGen’s view):
17th January: Non compliance letter handed out to the Hungarian government.
18th January: The European parliament meets. Hungary could/should be discussed in the light of Article 7 and the possible suspension of voting rights of the country under EU rules. Note that this would be a lengthy issue though.
20th January: Tamás Fellegi and government advisors meet Olli Rehn. The message they will hear will be in line with the above, namely the issue of
on-compliance and no aid package discussion.
24th January: Ecofin meeting and possible talks of suspension of cohesion funds to Hungary. This could be a lengthy process too if the EU Commission decided to go down this way.
Two months from now: Should the Fidesz government fail to reply to the EU Commission.s
on-compliance letter to be published on Tuesday, the EU Commission would then start an infringement procedure. This procedure would be followed by a
easoned opinion two months later.
18th January: The European parliament meets. Hungary could/should be discussed in the light of Article 7 and the possible suspension of voting rights of the country under EU rules. Note that this would be a lengthy issue though.
20th January: Tamás Fellegi and government advisors meet Olli Rehn. The message they will hear will be in line with the above, namely the issue of
on-compliance and no aid package discussion.
24th January: Ecofin meeting and possible talks of suspension of cohesion funds to Hungary. This could be a lengthy process too if the EU Commission decided to go down this way.
Two months from now: Should the Fidesz government fail to reply to the EU Commission.s
on-compliance letter to be published on Tuesday, the EU Commission would then start an infringement procedure. This procedure would be followed by a
easoned opinion two months later.
Bailout deal by end-March would be a mircacle
On the timing of any aid the market is of the thinking that an aid package could be in place by March, SocGen’s analysts noted.
A few analysts in a Portfolio.hu poll conducted in early 2012 said the IMF/EU could grant Hungary a credit facility already this month, but almost half of the respondents expected the deal only in March. It is noteworthy and reflects a high degree of uncertainty that nearly 30% of the analysts believe aid talks will drag out until June or July.
SocGen’s "own" poll based on its clients travelling with them in Hungary attaches a 75 to 80% probability of such an outcome, i.e. a deal by end-March.
“We believe that a deal reached by March would be a quasi “miracle" and would require that all goes very smoothly and efficiently on both sides of the negotiating table."
SocGen’s sources stipulate that the best case for an aid package would be “50 to 60 days from any changes in Revised Central Bank and Stability Laws being adopted by the parliament. More likely though a time-frame of 3 to 4, maybe even 5 months, and this is assuming that the Hungarian government does not try negotiating the terms of the revised Central bank and Stability laws."
MPC divided, but...
Having met “many members" of the central bank (NBH), SocGen’s analysts came to the following conclusion. While the Monetary Council is “heavily divided" at the moment, there is one factor that unites the NBH, which is “the recognition that it is absolutely essential for the central bank to maintain market stability while any negotiations between the government and the EU/IMF are still under way."
“One thing that is quite clear in our view: a speedy return to 325.00 for EUR/HUF would unite the council in calling in calling for an emergency meeting and a forceful response would then be delivered," the analysts said. They would then expect a hike in the region of +200bp to +300bp.Emergency rate meeting is a clear risk
According to all of SocGen’s contacts, the NBH is still working under the scenario of an EU/IMF deal being put together.
“There is clearly a risk that the NBH could call an emergency rate meeting and hike aggressively even as talks are ongoing. This would require a speedy return of EUR/HUF to the 325.00 mark again. Growing frustration on the part of investors about the pace of EU/IMF talks could have HUF assets come under extremely severe pressure again. This is a genuine risk base on the information we have gathered in Budapest about the possible timing of any EU/IMF aid."
If Hungary failed to secure an aid package, the NBH would rather not adopt direct FX intervention but rather “use other tools such as rate hikes and quiet intervention."
“The NBH could also decide to intervene in the short end of the bond market, buying T-bills and short-dated HGB's as it did in late 2008. We have the feeling that the NBH would only reluctantly use direct fixed-income purchases."
“Based on all the information that we have gathered, we fear that the +80bp hikes priced in over 3 to 6 months are the "friendliest outcome" to be expected. A slow process to reach an EU/IMF deal could easily send EUR/HUF back to 325.00 where we feel the risk of an emergency hike will be very much present and it would be an aggressive one."
Strategy implications: Buy EUR/HUF in this dip
SocGen’s analysts and strategists believe that “the short-term Hungary-specific risks are not priced in by the market, especially in the context of a global markets backdrop that also remains challenging in the wake of the recent wave of rating downgrades in the EU. We therefore like to buy EUR-HUF at the current level."
“A number of risks arise with this trade. Firstly a long position in EUR/HUF hinges on a continued challenging global market environment. In addition, this trade would work better if our view that any EU/IMF negations will be length and challenging proves warranted."
Others are more upbeat
Other investment banks addressed the Hungarian situation over the past few days. Analysts at Morgan Stanley, for instance, believe a bailout deal with the IMF/EU will be reached before the end of the first quarter. The Prime Minister’s more conciliatory remarks have reduced the likelihood that more extreme negative scenarios will materialise, they said in a recent research note.
