Not to rain on everyone’s parade, but it seems to me that all the merriment and back-slapping over Hungary’s surprise €1 billion bond issue last week is perhaps a bit overdone. Yes, sure, it is not a bad sign that private investors – as oppose to the IMF, EU and other publicly-owned entities – are again willing to take Hungary’s IOUs. And the transaction and any that follow this year could even lower the country’s interest costs. Still, it’s hardly cause for celebration, for at least two reasons.
One reason is that, even though coupon on the five-year bond was a relatively rich 6.75%, this is taking into account the fact that the IMF and EU have already bailed out Hungary once recently, and would do so again. If the bond had the same yield as a similar issue from Germany or France I might be impressed.
Another is that new access to global debt markets can hardly be the solution to Hungary’s economic problems, when a primary (or the primary) such problem is the country’s continuing habit of borrowing to finance consumption. It’s like congratulating an over-indebted consumer on somehow managing to get a new credit card or overdraft just because a few months ago it was impossible.
Anyway, these are just two quick reasons to not jump for joy. I’m sure there are others – possibly even 999 million more.
Exactly right. Besides, someone “willing to take Hungary’s IOUs” does not mean all that much, considering that the State of California (USA) is also issuing nothing but IOUs these days. At least over there in Yankeeland, they have something tangible behind them. While in Hungary, it is almost all hot air.
Erik you might not be impressed, but the success of getting the bond placed does demonstrate a couple important things:
(1) Greed is again replacing fear as a driver in the market;
(2) Central Europe has especially benefitted from the above over the last couple of months (According to the WSJ, Hungarian CDS spreads have tightened by 85 bps in a month);
(3) The October IMF/EC bail out of Hungary is working in so much as it has restored stability in the market;
(4) The external imbalances in the economy are adjusting very rapidly with record high c/a surpluses and trade balances;
(5) The IMF and the market believe the Govt’s fiscal policy has credibility (for the first time ever);
(6) The conditions may be in place finally for real interest rate reductions which are one (of many) preconditions for future economic growth.
In the end, it is obvious that a major problem in Hun is that level of both government and private debt. But the fact remains, the Country must still continue to borrow. They either do it on the market or they do it via multilateral handouts or by printing money. Do you really see a Euro bond as the worst of these options?
@NWO: I didn’t say anything that contradicts your six points, which are all valid. I just think that there are similar benefits to being over the barrel in re new lending. All the markets will do is demand a higher coupon, but what Hungary really needs is old-style conditionality. Knowning the window is open again just takes a bit of the heat off, that’s all.
@NWO. Do you think the worst is over? http://www.zeitgeistmovement.com specifically takes aim at the IMF, The World Bank as well major corporations and has fashioned a theory about how, under the guise of being well intentioned, the loans are actually devices to hook and then hobble nations. Though I don’t quite see all the thinking, they’ve made some strong points through evidence of how these 2 organizations have forced devaluations, reduced GDP per person, privatized the national assets & resources, snuffed out social services, and so forth in many of the countries that they piously first claimed to be out to save.
Now, I’m not prostyletizing for this group; I don’t know how much of it is like Mel Gibson’s Conspiracy Theory nuttiness – could all be, but the basic concept of dictating public policy as one now ‘foots the bill,’ isn’t too far fetched. And if HU is unable to repay (which given its current spiral of repeatedly squeezing out the segment of society that would create wealth), then what will be the next phase?
Am I wrong, or was it that HU only issued forex paper? Do the capital markets have many avenues at the moment, and HU is the most attractive? How much of the HU budget is currently set aside for debt service, and debt repayment? Am I right that this last set of injection, along with the Special Drawing Rights has dramatically increased the debt (service)? Can the country reverse this and still remain competitive?
There’s an interesting discourse on debt-based monetarism; and it could explain why groups such as the IMF happily lend away to strapped countries.
http://en.wikipedia.org/wiki/Debt-based_monetary_system