What will the Greek elections bring for Hungarian markets? - Portfolio.hu Poll

The three possible outcomes the potential impacts of which we have asked analysts, fund managers and market investors about were the following:
1.) New Democracy wins and forms a coalition with the other traditional party;
2.) Syriza wins, immediately terminates the EU/IMF agreement and announces default;
3.) The outcome of the elections once again makes coalition governing impossible.

We wanted to know what short-term market reactions (i.e. within a few days) could there be on the forint’s exchange rate and government security yields. (In this respect we need to note that under scenario #2 the events are likely to unfold slower than within just a few days. However, on the basis of comments by Syriza and international lenders observes believe that the credit deal will sooner or later will be declared null and void.)

1. New Democracy wins and forms a coalition with the other traditional party (Socialist PASOK)

“Although the political gridlock would be solved and there would be an operable cabinet, the problems of Greece will not vanish overnight. The country would still need the EU’s financial assistance and go ahead with the austerity measures. An escalation of the Eurozone’s debt crises carries further substantial risks," a local analyst group explained why they expect moderate market reactions to the solution of the Greek political standstill. At the same time they believe this scenario is likely to bring about a short-lived but spectacular rally on the Hungarian markets too. As the first positive reactions peter out, however, a correction in the other direction will likely follow.

Another group of analyst also project that the positive impacts (forint strengthening, drop in yields) will be only temporary. “Even under this scenario Greece is unlikely to avoid default. The existing social resistance simply cannot be shunned off by politics. We believe that even in this case the credit deal will be renegotiated, but the government’s negotiating position will be less threatening than if Syriza would win. Exiting the Eurozone will not be used as blackmail card; they will rather fall back on the country’s social-economic-political situation and the feasibility of the austerity programme."

“Markets would remain sanguine, happy there was a deal at the end of road even if not necessarily immediate," another London-based analyst said.

The consensus of estimates for EUR/HUF (around 20 June) is 290 and the respondents expect the yield on the 10-yr bond to go to 8%, both mean firmer levels than the current ones.

2. Syriza wins

“It’s a pretty straightforward consequence: if Greece goes into default then the only way ahead is the exit from the Eurozone, a massive devaluation of the new currency (not to mention the difficulties of putting it into circulation), capital flight, and possibly the sealing off of the borders. The Greek economy can find itself in a much bigger hole than it is already in - and very quickly too," responded the economists who believe the most important task of European policy makers in this case would be to find a way to avoid spillover to the other periphery economies. In this respect, many respondents stressed that the European debt crisis and the uncertainties around Hungary’s aid talks with the IMF are such factors that can exert a substantial influence on the local financial market conditions even if this scenario materialises in Greece. It is also worth taking into consideration what measures the G7 central banks will take to stop the contagion and how quickly can the Hungarian government strike a deal with the IMF to avoid a current account crisis.

“The risk here is that a backstop cannot be put in place in time even if the government were to fully cooperate and the banking and portfolio flight would lead to a BoP event like in 08/09," a London-based analyst said.

With such assessments it is no wonder that the forecasts are spread on a much wider scale than under scenario #1. Several respondents said there is a chance that the forint will weaken to its all-time low vs. the euro and that the yield on the 10-yr bond gets back way into double-digit territory. But these are only at the very extremes of the estimates. The consensus for EUR/HUF came to 311 and that on the 10-yr bond to 9.55%, which are not negligible weakening but far from a really disastrous scenario.

3. No new government can be formed

This potential scenario is perhaps the least-discussed of all, while the polls tell us that its probability is not negligible at all. And this scenario is not a “middle way" as we would think at first sight. “This may be the worst outcome of all, which could immediately entail sovereign default, abandonment of the euro, chaos and the disruption of social order. The state will not be able to take care of its duty and potentially even a military regime could take over," a Budapest-based analyst said. Another economist is of the same view, saying in this case the forint will be subject to depreciation again.

“This scenario can see the orderly progression to a backstop with increased probability and markets then remain confident a backstop is near," a London-based economist wrote.

Some believe this scenario converges to scenario #2 only in the longer term: “Unsuccessful negotiations would lead to weakening on the markets because Greece is running out of money quick therefore further uncertainties would only increase risks of default. That is why, although the immediate negative impact would be smaller than if Syriza won, if Greek policymaking remains incapacitated, the situation will be similar to the one when Syriza won and default will be declared at once."

In light of this it is no wonder that the consensus figures are hardly different from those in the previous scenario (EUR/HUF 310 and 10-yr bond yield 9.48%). As you can see on the chart above the estimates are spread on a relatively wide scale. And this can lead us to yet another conclusion: a victory by the Syriza party and an incapacitated government would trigger huge uncertainties. Although a win by the traditional parties would not do away with the problems of Greece, at least it would give a chance to money and capital markets to calm down at least for a while.

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