When will forint bailout run out of euro buckets?

With the euro/forint rate having seemingly settled into a relatively narrow band around Ft 300/€, there has been a lot less howling about the strength of the Hungarian currency, which is of crucial importance to the millions of households and domestic firms that have borrowed big in non-HUF terms. But before everyone gets comfy again, it should be remembered that the new “floor” for the forint may not be something that the market is comfortable walking on. Instead, the stabilization seems to be largely the work of heavy state intervention, both in terms of verbal support for the currency by the monetary authorities, as well as major purchase of forint-denominated assets using money that will eventually have to be paid back.

Note, for example, that last Friday the government said it was about to draw down the second, €2 billion tranche of the last fall’s EU bailout loan – a draw-down that is taking place while similar billions of euros of Ft-denominated assets are being bought up with official money.

The link between such loans and market operations may not be absolutely direct. But the overall trend seems pretty obvious: the Hungarian state is trying to prop up its currency by using borrowingings from abroad and mopping up forints.

Of course, there is nothing new or unusual about such a response to a nose-diving currency; just look at all the billions the Russians have burned trying to avoid another ruble rubout. But it seldom succeeds, for the simple reason that eventually the fire used to keep the machine going runs out of the foreign exchange that is its fuel.

So the question isn’t so much where the forint will go tomorrow or next week. There’s plenty of money to keep this going for a while. The question is what will happen when ready money for buying HUF runs out. And the obvious answer is: look out – below.