Global Investing

Counting the costs of Hungary’s Swiss franc debt

The debt crises in the euro zone and United States are claiming some innocent bystanders. Investors fleeing for the safety of the Swiss franc have ratcheted up pressure on Hungary, where thousands of households have watched with horror as the  franc surges to successive record highs against their own forint currency. In the boom years before 2008,  mortgages and car loans in Swiss francs seemed like a good idea –after all the forint was strong and Swiss interest rates, unlike those in Hungary, were low.  But the forint then was worth 155-160 per franc. Now it is at a record low 260 — and falling – making it increasingly painful to keep up repayments. Swiss franc debt exposure amounts to almost a fifth of Hungary’s GDP. And that is before counting loans taken out by companies and municipalities.

Hungarian families could get some relief in coming months via a government plan that caps the exchange rate for mortgage repayments at 180 forints until the end of 2014.  But the difference will have to be paid – with interest — from 2015.  Meanwhile, the issue threatens to bring down Hungary’s banks which must pick up the cost in the meantime and will almost certaintly see a rise in bad loans –  no wonder shares in Hungary’s biggest bank OTP are down 25 percent this month.  “(The franc rise) suggests a massive jump on banks’ refinancing requirements going forward, ” says Citi analyst  Luis Costa.

These overburdened banks will end up cutting lending to businesses, meaning a further hit to Hungary’s already anaemic economic growth. ING analysts earlier this month advised clients to steer clear of Hungarian shares, “given the burden from (forint/franc) depreciation not only on loan-takers but also the implications this has for the domestic growth story.”

Thanks to some deficit cutting measures and low inflation, Hungarian bonds have been among fund managers’  favourites this year. Unlike countries such as Brazil or Poland, Hungary was not raising interest rates. Citi’s Costa says longer bonds are still being too slow to price the risks – he predicts  the 70 basis point spread between two-year and 10-year Hungarian swap rates will widen much further. And late on Wednesday, JP Morgan said it was going underweight Hungarian bonds. Analysts there suggest that at a time when other emerging markets are preparing to slash interest rates, the falling forint might force Hungary’s central bank to do the opposite.

from MacroScope:

Turkey sets dovish tone for emerging central banks

Amid widespread shock over Turkey's interest rate cut  last week, there were a few who felt the move might just make sense. With economic growth collapsing in the West, the developing world will take a hit sooner or later --- in such an environment lower interest rates are usually a good idea. So with a  global financial market rout under way, many more emerging policymakers could be contemplating following Turkey's example.

One central bank has already done so -- Pakistan on Saturday slashed  interest rates by half a percent. That surprised analysts there, all of whom had predicted unchanged rates, given inflation is running above 12 percent. Now there is speculation Israel,with its close economic ties to the United States, could also be forced into a rate cut later this month.  Policymakers in other emerging economies that are midway through the rate tightening cycle are backpedalling on prospective  increases -- South Korea's central bank, which some had predicted would tighten policy later this week, said on Tuesday it was putting rate hikes on ice. Markets have "changed dramatically," its governor told parliament.

Manik Narain, emerging markets strategist at UBS says that while inflation is still an issue for many developing countries, safeguarding growth -- and exports via a cheap currency --  is becoming a bigger priority.

"After Turkey, any stigma associated with cutting rates has been removed," Narain says.  "Across the board we are seeing rate rise expectations getting pared back."

from MacroScope:

Turkey stuns with rate cut but is it on to something?

Turkey's central bank, never known for its orthodox approach to monetary policy, managed to stun markets yet again today. Faced with a currency that has fallen over 5 percent against the dollar in the past five weeks, the bank decided to cut interest rates by half a percent, helping the lira plumb fresh 28-month lows. Analysts had expected it to raise the overnight borrowing rate by 350 basis points, which it duly did as well. In addition, it said it would start auctioning dollars if needed. A real policy mix, as one bond trader in London remarked.

On the face of it, a rate cut is the last thing Turkey needs -- the economy is clearly overheating, with first quarter growth over 11 percent. Inflation is above target and there is a huge current account deficit that  needs financing. According to RBS analyst Tim Ash, "the danger with this totally out-of-the-box move is that investors will seriously begin to question the credibility of the central bank as an institution".

But some observers, puzzling over the move, are wondering if the central bank could really be ahead of the curve this time. The bank said the rate cut was needed given potential risks to the Turkish economy from the deepening global weakness. After all, its decision comes  on the heels of an unexpected Swiss rate cut and Japan's yen market  intervention -- both moves dictated by the need to curb surging currencies. There is talk of more bond buying from the ECB and the U.S. Fed.  And another emerging central bank, Russia, on Thursday held interest rates steady, stressing the need to guard against a slowdown during an uncertain time.

What Turkey is essentially doing is betting on a global recession, say BNP Paribas analysts. They say the central bank's strategy could pay off  "if the global recession is deep enough and it doesn't lead to a global selloff of risky assets."  It remains to be seen if other emerging central banks follow its example.

Chavez health scare keeps the bid on Venezuelan bonds

Venezuelan President Hugo Chavez last week declared himself reborn, phoenix-like, for his 57th birthday, singing and jigging on the balcony of his palace, belying his cancer diagnosis.  That may have disappointed some investors who hoped  the left-wing leader’s health issues would  prevent him from contesting or winning yet another presidential term. Venezuela’s dollar bonds, considered among the riskiest debt securities in the world, have risen sharply since Chavez announced his illness — the most-traded 2027 bond is quoted around 77 cents on the dollar, more than 10 cents off  troughs hit before his operation in June.

Market players are sensitive enough not to mention Chavez’s health problems.  JP Morgan analysts for instance this week recommended an overweight on Venezuelan bonds, citing  “idiosyncratic domestic political events where positive outcomes could offer important market upside, the odds of which may still be underpriced.”

Stuart Culverhouse, head of research at frontier markets brokerage Exotix, is more succinct.  “I think anything that points towards a possible change in government, that would bring with it a more orthodox policy direction, would be welcomed by the market,” he says.

It is political risk that has kept Venezuelan bond yields in the mid- to high-teens. Fear the mercurial president will suddenly declare a default has so far outweighed the fact that his  country could earn well over $90 billion from oil exports this year.

from Jeremy Gaunt:

Debt crisis on the beach

This is supposed to be the time the Greeks call “ta bania tou laou” – the people’s bathing.  Markets are supposed to be quiet. Analysts have done their two-month outlooks for July/August and traders are working on their tans.

Not this year, at least in Europe.  The Greek bailout fight and the previously unthinkable march of Washington towards default have nailed a lot of people to their desks.

European equities  volume in July, with one session left, is 47 billion shares. That compares with 35 billion a year ago and 29 billion in 2009.

The beaches must be empty.

from Jeremy Gaunt:

When Franglais doesn’t work

English is the dominant language in financial markets and economics -- which means that speaking anything else can bring all kinds of trouble with it.

I recall an occasion in the mid-1990s when a newly appointed French finance  minister opined in a formal European Commission press conference that markets should "réévaluer" the French franc.

French journalists looked on in confusion as most of the English speakers rushed to the phones to report that the minister was calling for a revaluation of the franc.

What had happened was that the "réévaluer" -- which means to reevaluate -- had been translated by the official translator as revalue.  A comment that the franc was stronger than the market was giving it credit for, thus became -- for a short time, until corrections flowed -- a franc in need of formal strengthening.

Avoid financial meltdown – use a thesaurus

So it’s not just investors who are guilty of moving in a herd-like fashion.

Financial journalists use the same verbs and nouns with greater frequency as stock markets overheat but display more variety in their phraseology after the bubble bursts, a study by Irish computer scientists has shown.

Trawling through nearly 18,000 on-line news articles that mention the Dow Jones, FTSE and Nikkei stock indices between 2006 and 2010, Aaron Gerow of Trinity College Dublin and Mark Keane of University College Dublin found that the language used by the writers had become more similar in the run-up to the global financial crisis.

“Meaningful regularities” in language employed before the crash showed “progressively greater agreement” in “positive perceptions of the market”.

from MacroScope:

BlackRock’s Doll turns cautious

BlackRock's Bob Doll, one of the most heavy weight U.S. equity managers, has signaled a new note of caution on the U.S. economy, warning that if growth does not start to pick up in the second half of the year then it will be time to cut back on equity exposure.

Wherefore this new found reticence from Doll, who has been solidly bullish this year? Like many other investors, the first half economic slowdown caught Doll on the hop. He now believes the U.S. economy is at a critical juncture and investors need to be especially vigilant going into the second half.

U.S. growth in the first half of the year now looks like it will come in under 2 percent. Doll points out that since 1960, every time year-over-year growth has dipped below that level the United States has gone into recession.

So has Doll finally turned bearish? No. He expects the recovery to continue, particularly now that gasoline prices have fallen and the drag from supply disruptions from Japan's earthquake is fading. But the economy is not out of the woods yet, Doll argued in a research note to clients.

from Karen Brettell:

Germany Again Looks Riskier Than U.S.

The potential for contagion to even the safest European countries has overtaken fears about the U.S. deficit, including risks associated with Washington's wrangling over the debt ceiling, according to the credit default swap market.      The cost of buying protection on German bonds rose above that of U.S. Treasuries on Monday for the first time since early May as concerns about contagion from Greece, Portugal and now Italy sent borrowing costs for peripheral European countries spiraling   Though German bunds rallied, the cost of insuring the country's debt in the CDS market jumped to its highest level since February 22, according to data by Markit. The CDS last traded at 55 basis points, or $55,000 per year for each $10 million insured for five years, up from 46 basis points on Friday.   U.S. debt protection costs, by contrast, have fallen over the past few days, trading at 51 basis points on Monday, down from its most recent high of 55 basis points on Thursday.   The swaps of the two countries had traded roughly in line with each other through April and the beginning of May, when fears about the prospect of a U.S. default increased. U.S. CDS had traded roughly 5 to 10 basis points more than Germany's CDS from May until Monday.

from MacroScope:

Give me liberty and give me cash!

Come back Mr Fukuyama, all is forgiven.

In his 1992 book "The End of History and the Last Man", American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually 'immortal' in countries with a GDP per capita above $10,000.