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Hungary and the IMF – Eurocritical?

Quite often I am asked when I think somethig is going to happen. I usually say, if I could give an accurate time frame I’d be either very rich indeed or on a black bag flight to nowhere. Luckily for me I am notoriously bad at guessing time frames. I usually call things far too early. Basically I have underestimated the extreme measures those in power have had at their disposal to maintain the status quo.
But what I feel I can say, is that something rather significant has happened this weekend. Something that should have a large and rippling impact on the week or weeks ahead. Something that I think has deeper significance than might at first appear.

For a few months now I have been writing about the importance of Hungary, Rumania and Bulgaria. In “Bank Bail out in the making” I suggested that Hungary’s latest actions might precipitate another European bank bail-out and one we could see unfold as it happened.

This weekend comes news that makes this seem more likely than ever.
The IMF and the EU have been in Budapest for a while now reviewing Hungary’s progress and plans as set down in the IMF/EU agreement as conditions for EU/IMF on-going ‘support’. A couple of weeks ago I told you how the government had started to make noises about being allowed some leeway on its austerity targets and getting a new 10-20 billion euro ‘precautionary fund’. As many inside and outside of Hungary said at the time, this seemed guaranteed to unsettle the IMF. And it did.
The IMF suddeenly announced this weekend it was suspending all negotiations and leaving -returning to Washington DC. The IMF added it was leaving without having discussed any new finding. The EU didn’t say it was leaving but said negotiations were suspended on its previously agreed funding. The IMF departure may halt everything.
This will leave Hungary, on Monday morning, with no agreement going forward and quite possibly major questions even about the support it is supposed to be able to count on now.
This will do several things. It will mean the Florint, which had already crashed in value particularly against the Swiss franc before regaining a little, will crash anew. It could lose quite a lot of its value. The CDS costs of insuring its debt will soar and this will mean Hungary will most likely see its borrowing costs jump up or not be able to sell any debt at all and face another Bond no-bid failure.
To see what effect that will have (I do think it is a ‘will’ not a ‘might’) we need to remind ourselves to whom and to what Hungary and its banks are tied.
First remember that Hungary has been trying to force its banks to pay a bank tax. Remember also those banks are Hungarian in name but largely owned by west european banks – KBC, Erste Group Bank, intesa Sanpaulo, Raifeissen International, BeyernLB and Unicredit. Those banks are themselves in dire trouble. KBC is already selling whatever it can to raise cash.
Those banks are Belgian – KBC, two of the largest three in Austria – Raifeissen and Erste, One of Germany’s most badly exposed Landesbanks- BeyernLB and two Italians that between them have 2 trillion in loan exposure based on less 61 billion in market capitalisation.
Belgium would have a hard time keeping KBC alive. Austria would NOT survive any collpase of its two banks. Italy’s banking sector is unexploded ordinance simple as that. All of them are tied to France and Germany.
Hungary is thus small but tied to already teetering giants in other countries.
Now add in Hungary’s sideways links. Whatever happens on Monday and next week, to Hungary it will destablise both Rumania and Bulgaria. The banking systems in those neighbors are weak and tied to many of the same foreign banks. For example the exposed Austrian banks Erste and Raifeissen have between them about €35 billion in Rumania, Bulgaria and Serbia. Those country’s are also very much tied to Greece and its banks. Whose banks are tied again to France and Germany.
So that is a reminder of the situation. Now lets analyse what happened and possible reasons why, from as many perspectives as we can.
First Hungary. Internal commentators have said ‘this is madness’. Externally people have said Hungary is going to cause its own demise. Another way of looking at the situation is that Hungary is playing hard ball as the Amercians like to say. Greece has a supposedly socialist government while Hungary’s is centre right. The real difference between Greece and Hungary is that several of the leaders of Greece are in fact bank men, of whom several are Goldman Sachs men. Hungary’s new government has fewer bankers in its nest.
I think Hungary has decided the EU has at least as much to lose than it does. I think Hungary is playing brinkmanship the way the Greeks thought about doing before capitulating.
And I think Hungary is correct. The EU has much more to lose. The EU is in a very bad place now. It cannot be seen to be blackmail-able, or all credibility will be lost and it will be seen to be open season for every debtor nation to write itself a blank check. That would lead the German’s to pull up the draw bridge and leave the French standing alone on a large landmine.
On the other hand, to let Hungary throw itself into insolvency would definitely precipitate a europe wide bank crisis. Some way would have to be found to either bail out Hungary but deny it, or to bail out the Euro banks.
The Swiss are drawn into this now, rather centrally. The florint is worst off against the Swiss franc and a large proportion of its debts (proabably most) are denominated in swiss francs. This means everytime the Florint devalues against the Swiss Franc Hungary’s debts get a little more unpayable.
The more dangerous tie for the Swiss, however, is via the euro. If the Euro plunges this will on the one hand lead to another vast flood of cash out of the euro into the Swiss franc, out of European banks into Swiss ones (basically a european bank run in slow motion), and will make the Swiss franc appreciate beyond control. As it appreciates so the Florint is worth less and less , making more and more Hungarians unable to pay their mortgages and loans which makes their banks/our banks even more likely to fail. Which of course also imperils the euro as a currency.
At the same time the euro connection also raises fears about the Swiss central bank, because the Swiss CB is now stuffed with hundreds of billions of Euros it has bought trying to depreciate its own currency. And of course the Euro itself is now backed by hundred and hundreds of billions of euros worth of largely worthless bonds from Spain, Greece, Ireland, Portugal and Italy. And possibly soon some Hungarian ones as well, by some back door method.
All these players are handcuffed together and are all stuffed into an old coach hurtling at high speed down narrow mountain roads with passengers fighting over the steering wheel and stamping randomly on both the accelerator and the brakes at the same time.
Lastly I think it worth looking at the IMF versus the EU. Politics at the global level is a lot like Medieval politics in how messages get conveyed. So much of it is physical. In the Medieval world who followed who into a room who sat with who showed you litterally who sided with whom. It is where the phrase came from.
The IMF not only left Hungary but also very publically left the EU sitting there looking a little foolish and exposed. The IMF would not do such a thing without considering how it would look. Therefore it looks as it was intended to look. And remember where the IMF returns to – Washington DC.
By leaving, the IMF making a very public statement about the power of the EU versus the US, of Berlin versus Washington. The departure of the IMF exposes the EU and therefore Berlin. The Hungarians situation is dangerous. It would take conserted EU/IMF effrot to contain it. That the IMF has walked away, says to me they are using it to expose Berlin and Europe. Put the spotlight of failure on them. Make them have to ask for IMF help. This strengthens the IMF, and is designed to allow Washingtoon to teach Berlin a lesson.
We have been trying hard to escape the pull of our debts. Once again we are being pulled back, in an accelerating sling shot around the debt singularity in whose gravitation grip we are still caught.

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3 Responses to Hungary and the IMF – Eurocritical?

  1. theprofromdover July 19, 2010 at 9:15 am #

    No. 1 -If the bomb was ticking and you couldn't stop it, you either wait for it to blow you up, or you snip a random wire or two.
    Perhaps Hungary wants to try and snip some wires, what does it have to lose?
    (Damn the torpedoes.)

    No. 2 -I am sure the US-flavoured IMF is more worried about a new Deutchmark, than any collateral damage to Hungary & the Bulgars.

    No. 3 -The more the Swiss franc increases in value, the worse the chances of them recovering any debts; at what point does that become a Mobius strip?

  2. frog2 July 19, 2010 at 9:56 am #

    Hi Golem, a few comments added to friday's post…

    Meltdown ? Yet another exciting week ahead , with the ATM's still working …but I do wonder how much our politicians are aware of what is happening ?

    Are they planning positive radical actions or just re-arranging the few paperclips on their desks ?

  3. Golem XIV - Thoughts July 19, 2010 at 10:24 am #


    Of course there is no way of telling if teh Hungarian leaders are clever or just confrontattional. But it does seem to me they are at the very least not folding yet but raising the stakes. They could still back down or they could go fro broke (literally) and call everyone's bluff.

    I am suer the US and the IMF are more concerned about the sudden independance of Germany. But I do think Washington's many departments would love to see Germany put in a osition where they seem unable to cope and their actions undermine the strength of the EU. Both would suit WDC quite well.

    The point at which the Swiss recover too little – good question. I have no idea. But today's action won't be helping.Let's watch and see when and how big the Swiss CB currency intervetion is.


    Radical actions? Not by my definition. Large and unwise actions? More than likely. They have gone so far down their present policy shaft I can't see them having the balls to admit it was wrong now. I thnk they will go for anotherbail-out. It will be a disaster if they do. But I think it's all they can see.

    I don't think they believe the things that I advocate. I don't think they believe my kind of argument at all. They are entirely captured by the policy mind-set which suits the bankers and the rest of teh finanial class.

    Plus this whole bank crisis is allowing the Tories to accomplish all the things they wanted to do but were not able to do via the ballot box. Now they can do it all.

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