Hungarian Government's Default Comments Unnerved The Market
European sovereign crisis remained worrisome and concerns over Hungary's default weighed on peripheral European debts after comments from Hungary leaders. Stoxx 600 reversed sharply after hitting an intra-week high of 251.39 on Thursday as the concern intensified. US stocks followed and the fall accelerated on disappointing non-farm payroll. VStoxx, a gauge of volatility using Euro Stoxx 50 options prices, and its US equivalent VIX, rebounded strongly to close the week. Hungarian leaders and members for the EU and IMF quickly came out and downplayed the comments. But the conflicting messages were not accepted by the markets as confidence was hurt and global financial markets remain under tremendous pressure as the week starts.
As indicated in the table below, 2-year and 10-year government bond yields for PIIGS and Hungary rose last week. Among them Hungarian and Greek yields surged the most. Compared with German bunds, yield spread between 10-year Hungarian bonds and corresponding German bunds soared +133.4 bps while the yield spread between 10-year Greek bonds and corresponding German bunds rose +78.7 bps.
Last week, Lajos Kosa, Deputy Head of the ruling Fidesz party said Hungary had 'slim chance to avoid the Greek situation'. The comment was reinforced by Peter Szijjarto, a spokesman for Prime Minister Viktor Orban, that the country's economy was in a 'very grave situation' and 'default' was 'not an exaggeration'. These comments spurred worries about deficit problems in Europe and the Hungarian market tumbled with the benchmark stock index, Bumix Index, losing -3.135 and Forint plunged more than -8% against the dollar. While Hungary is a member of the EU, it's not using the euro. Yet, the euro was hit hard and dropped below 1.2 against the dollar on Friday. Growth currencies such as Australian dollar and New Zealand dollar also got hammered.
Seeing the damage on the financial markets, Hungarian leaders and members for the EU and IMF quickly came out and downplayed the comments. Mihaly Varga, Orban's chief of staff and a former finance minister said 'Any comparison with countries that have much higher credit default swap ratings than Hungary is unfortunate ... The comments that have been made about this issue are exaggerated, and if they come from colleagues that's unfortunate'. Both the IMF and the EU were surprised by the comment while Moody's said 'Hungary isn't the next Greece' and the country has 'a good track record of doing what it needs to do when in trouble'.
Some analysts said the new government's exaggeration on the deficit problems is a political strategy so as to let the austerity measures be approved more easily. According to European Commission's estimates, Hungary's deficit will widen to 4.1% of GDP in 2010, compared with an average of 7.2% in the EU and 9.3% in Greece. Government debt will increase to 79% of GDP, compared with 80% in EU average and 125% in Greece.
However, these inconsistent statements were not accepted by the market and prices remained under pressure at Asian session today.