A Hungarian delegation prepares to resume talks with the International Monetary Fund this week, hoping to secure a credit lifeline while investors continue to push up the country’s borrowing costs.
Many investors fear that the government’s reluctance to reverse new legislation, which is seen as contrary to EU rules, could prevent Hungary from securing new loans from the IMF and the European Union.
But is there a real chance that a financing deal will not be found, forcing the country to default on its loans? Or is Prime Minister Viktor Orban’s refusal to give in to the demands of the EU and the IMF little more than a bit of political posturing? Bartosz Pawlowski, Emerging Market Strategist at BNP Paribas believes the county’s underlying fundamentals are solid.
“They have corrected their external balances. They have a current account surplus which is not something that many countries have in this region. The primary surplus is there. The only problem is the policy making,” he told CNBC on Monday.
He believes the five percent extra yield on Hungarian long-term debt should give investors an incentive to invest.
“I do think so. When you look at what’s priced in, there’s a lot if negativity…Before the month ends, we’re going to have more clarity and it’s going to be a good investment,” Pawlowski said.
Last week, ratings agency Fitch joined Moody’s and S&P in downgrading the country’s debt to junk status.
Prime Minister Orban’s unyielding stance has also impacted the currency markets. The Hungarian forint has declined markedly against the dollar and the euro. The yield on 10-year Hungarian debt is above 10 percent and has pushed yields on Austrian debt higher.
Austria’s banks are heavily exposed to Hungarian debt, along with Italian, German and Belgian banks.
Simon Quijano -Evans , EMEA Chief Economist at ING told CNBC last week that Hungary was facing a confidence crisis and that the government needed to take urgent action and modify the controversial laws, which EU policymakers argue limit the independence of the central bank.
“Markets are only listening to Orban, as he seems to have the biggest say,” Quijano -Evans said.
“Normally looking at emerging market countries we would see the government backing down on certain issues, getting an IMF/EU loan program in place. … But up to now, in the last two or three weeks we haven’t seen any indication of this,” he said.