Investors; Fasten Your Seatbelts!

Is this the next leg of euro-crisis 2010? Hungary will be in focus when markets open on Monday, as IMF and EU now have cancel the $25 billion rescue loan access. This comes on top of the revealing of the European bank stress test on Friday. It’s gonna be an interesting week, that’s for sure.

“One would definitely expect a weakening forint Monday. A 10-forint weakening versus the euro is quite plausible, and nobody knows how nervous the market’s reaction might be.”

Zsolt Kondrat

Hungary’s prime minister Ferenc Gyurcsany

Hungary’s prime minister Ferenc Gyurcsany

One of the most surprising news this weekend, is that the IMF and the EU effectively suspended Hungary’s access to the remaining funds in a $25 billion rescue loan package created in 2008 to prevent a financial meltdown of the country.

The timing of this development is most extraordinary, as only a month ago Hungary served as ground zero for yet another scare that pushed European sovereign bond spreads to new records.

The reason given for this dramatic, and very destabilizing action is that the nation must “take tough action to meet targets for cutting its budget deficit,” Tyler Durden at Zero Hedge writes.

Ostensibly Greece continuing to lie about its own economic deterioration is a necessary and sufficient condition for escalating IMF lauding. Yet, with Europe set to announce results of its Stress Test kabuki next week, the last thing the continent needs is a real liquidity crisis to counteract the smooth talking bureaucrats dead set into hypnotizing the union into “all is well” submission

Reuters reports: “Negotiations with the lenders had been expected to finish early next week. Analysts said the forint currency could fall sharply when financial markets reopen Monday due to uncertainty over the international safety net for Hungary, which has financed itself from the markets since last year.”

“In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced — 3.8 percent of GDP in 2010 and below 3 percent of GDP in 2011 — remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,” the IMF says.

Hungary’s politicians proves once again they are complete dilettantes when it comes to dealing with the IMF – instead of taking Greece’s lead and promising they would not only cut pension to zero, but demand the citizens pay for the privilege for working for the government, Hungary’s new political party apparently had the temerity of telling the IMF it can shove its demands.

Hungary’s new center-right government, which swept to power in April elections, says it wants to extend its current financing deal with lenders until the end of 2010 and seek a precautionary deal for 2011 and 2012.

Economy Minister Gyorgy Matolcsy made clear the government was keen to resume negotiations: “The government will of course continue talks with international organizations including the IMF and the EU,” he said in a statement published by the national news agency MTI Saturday.

Christoph Rosenberg, who led the IMF delegation to Hungary, signals that the Fund wants more on next year’s budget. “By definition when we come next time — unless we come next week — the government will have made more progress on the 2011 budget and that will be a very important budget,” he tells Reuters.

In an interview, he also says yhat the IMF have not discussed the possibility of a new financing deal for 2011 and 2012.

“We are aware of what has been said in public but in our meetings we didn’t really get to that point, because we obviously needed to first resolve the policy issues and those have not been resolved,” Mr. Matolcsy said.

Here’s the most likely scenario: The next Hungarian bond auction will fail, as will the HUF on Monday. Look for a plunge in the currency, and a surge in Hungarian, and Romanian and Bulgarian CDS when the market opens Monday.

Adding: “One would definitely expect a weakening forint Monday. A 10-forint weakening  versus the euro  is quite plausible, and nobody knows how nervous the market’s reaction might be.”

“If we do not have the safety net of international lenders, that hits us where it hurts most,” MKB Bank analyst Zsolt Kondrat says.

And for the version straight from the horse’s mouth, here is the non-hyperbolized perspective straight from portfolio.hu:

“Although Hungary, seeking to secure a precautionary loan deal with the International Monetary Fund, was to continue discussions with officials of the IMF and the European Union on Monday, the mission from the Washington-based lender decided to return home. The EU also postponed the conclusion of the review of the country’s EUR 20 billion credit facility granted in the autumn of 2008. The reason is that “a range of issues remain open” and the cabinet that will need to provide clarification for these. Brace yourself for Monday, folks!

The morning market reactions will be especially crucial as the central bank’s (NBH) Monetary Council will hold a rate setting meeting that day.

According to the consensus forecast of analysts in a Portfolio.hu poll, the MPC will keep the base rate on hold at 5.25%.

But a sharp HUF depreciation and a rise in Hungarian CDS (Credit Default Swap) spreads might convince the MPC to hike rates.

This, of course, will not help boost lending and economic growth.

h/t Zero Hedge

Related by the Econotwist:

Stress Level Rising In Europe; Some Banks Might Not Survive

EU Stress Test May Trigger Capital Injection Of EUR 85 Billion

European Banks Hunting For EUR 1,65 Trillion

German Banks With More Than 200 Billion Euro In Faul Credits

Fitch: Global Economy At Critical Juncture

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