New Twists In Hungarian Drama, The End Of The AAA Era And Credit Markets Chart Update

by: Acting Man

Hungary Back At the Bailout Trough As Investors Go On Strike

Today Hungary's government came under renewed pressure, as yields on Hungary's government debt keep soaring and a treasury bill auction failed.

As Bloomberg reports:

„Hungary raised less than planned at a Treasury bill sale as yields soared on concern the International Monetary Fund and European Union won’t resume aid talks.

The government sold 35 billion forint ($140 million) of one-year bills, 10 billion forint less than targeted, data from the Debt Management Agency, known as AKK, on Bloomberg show. The average yield rose to 9.96 percent, the highest since April 2009, from 7.91 percent at the last sale of the same-maturity debt on Dec. 22.

The cost of insuring Hungary’s debt through credit-default swaps reached an all-time high and the forint touched a record low versus the euro after aid negotiations stalled because of new laws that threaten to undermine the independence of the central bank. Hungary needs a deal as soon as possible and is ready to discuss the conditions, Tamas Fellegi, the minister assigned to lead the talks, told reporters today.

“Fellegi’s comments are aimed at providing reassurance, but I think the market will adopt a seeing-is-believing approach,” Timothy Ash, a London-based economist at Royal Bank of Scotland Group Plc, said in an e-mailed comment. “Market trust in this administration is now at rock bottom levels.”

The charts below show Hungary's two and ten year yields as of Wednesday's close – today they rose even further, although the momentum of the rise has slowed down somewhat.

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Hungary's 2 year government note yield goes parabolic.

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Hungary's 10 year government bond yield – today the momentum slowed as it increased only by another 4 basis points.

As the AP notes with regards to the changing stance of Hungary's government regarding IMF and EU aid, whereby the EU has already let it be known that its strained wallet will remain closed for now:

„With Hungary's credit rating cut to junk status by two U.S. ratings agencies and possible recession looming in 2012, the Central European nation's finances are on the edge. It has been hard hit by the debt crisis in the eurozone — by far its biggest export market — and the government has struggled to boost economic growth amid anemic domestic consumption and large debt burdens in both the public and private sectors.

Adding to its woes, Hungary has been in a standoff of late with international financial institutions over a new law that reduces the independence of its central bank.

"I can negotiate a safety net for Hungary, a financial solution with reasonable conditions we can agree to. This was never in doubt," Fellegi said. "The determined will of the government is to achieve a fast agreement" with the IMF and the European Union, he added. "The government is aware of the severity of the situation and what is at stake in the IMF negotiations."

The country's currency, the forint, hit a new low early Thursday at over 324 per euro, but recovered slightly after Fellegi's news conference. It was still under pressure at around 320 per euro at mid-afternoon in Europe. Analysts said Fellegi needs to act fast.

"The alternative to an IMF-EU financial aid package appears dire," said a report from French banking group BNP Paribas.

Without an agreement offering Hungary some €15 billion ($19.5 billion) to €20 billion ($26 billion), "Hungary would find it difficult to repay maturing external sovereign debt or refinance it on the market at a reasonable cost," the bank said.

Fellegi said he would travel to Washington next week to hopefully conclude preparatory talks with the IMF, but it seemed that a requested meeting afterward in Brussels with EU Economic Affairs Commissioner Olli Rehn will not produce results. "We could meet with them, mainly as a courtesy, but it will be clear that financial assistance will not be on the agenda," said an EU official, speaking on condition of anonymity to fully discuss the EU's position.

The official dismissed Fellegi's comments about how Hungary can borrow money on the markets as not credible.“

(emphasis added)

Evidently the EU is cross with Viktor Orban and wants to let him twist in the wind a bit. The EU obviously has more than enough problems already with the ongoing crisis in the euro area. On the other hand, the eurocracy can not be too happy to see yet another sovereign debt and currency crisis erupting right at its door step. We would guess that once Orban backs down with regards to the proposed new central bank law, the bailout money will start flowing again.

Note that Hungary's yields are still far below the levels seen during the 2008/9 crisis- see the long term charts below:

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Hungary's two year note yield, long term. During the 2008 crisis, it briefly topped 14%.

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Hungary's ten year bond yield only went above 12% in 2008, as the yield curve inverted sharply.

For readers interested in an excellent source of regular in-depth updates on Hungary's political, economic and financial landscape, we would recommend the English version of the site 'Portolio.Hu'.

The End of the "AAA" Era

Meanwhile, Germany and France are evidently coming to terms with the fact that their debt may soon no longer be rated AAA and that thereby the world's pool of risk-free collateral is doomed to shrink even further. There would of course be a way to circumvent the pending downgrades: if the ECB were successfully instructed to flaunt the spirit of the law and outright QE could be pursued with the aid of some clever legal trick, as Irish finance minister Noonan once suggested, then the rating agencies would likely adopt a wait and see approach (according to their own words). Alas, this is what Germany will definitely not allow to happen – hence, perversely, because it tries to be disciplined, it must fear for its credit rating! Apparently it matters though in which order the downgrades come hailing down.

As Reuters reports:

“The German and French governments have both come to accept that the era when leading eurozone countries enjoyed the very best sovereign debt ratings is nearing an end, but a downgrade could shake Paris far harder than it does Berlin.

Markets have been bracing for a cut in the triple-A rating of France and possibly other top-rated euro zone members since Standard & Poor's warned in early December of a mass downgrade due to concerns about the bloc's two-year old debt crisis.

Such a move in theory makes it more expensive for countries to borrow, ruling out buying by certain types of investors as well. If S&P were to follow through in the coming weeks and slash euro zone ratings across the board, economists say the financial and political backlash would be tolerable, as it has been for the United States since the rating agency controversially cut its debt last August.

But if France suffers a downgrade before Germany, as another rating agency Fitch has suggested, the level playing field that has existed between Europe's two biggest economies could be disrupted.

"There is a question about the balance of power if we see France downgraded first," said Mark Wall, an economist at Deutsche Bank in London. "If we move to a world in which France is not triple-A, will Germans see themselves as carrying the financial bags for the rest of Europe? There may be a political impact at the national level."

The impact in France, where President Nicolas Sarkozy faces an uphill struggle to win a second term in a two-round April-May election, would certainly be greater if Paris gets hit first. France is seen as the most vulnerable of the six triple-A eurozone states because of its debt and deficit levels, and worries about its ability to meet its own targets for cutting them.”

As we have previously noted, a downgrade of France or any of the other remaining six AAA rated euro area nations would also impact the rating of the euro area's bailout vehicle, the EFSF. So the future rating of France is of considerable import with regards to how the debt crisis in the euro area will play out.

Euro Area Credit Market Charts

Below is our customary collection updates of the usual suspects: CDS spreads, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Wednesday's close.

CDS on Spain and Italy have turned back up and are rising rather quickly again.

Naturally, CDS on Hungary are going parabolic along with bond yields – the main difference is that CDS spreads are at a new all time high now. CDS on neighboring Austria are also storming higher in sympathy, as Austria's banks still have a lot to lose in Hungary.

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5 year CDS on Portugal, Italy, Greece and Spain – CDS on Italy have now reversed again as well.

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5 year CDS on France, Belgium, Ireland and Japan – Belgium and France trending higher again.

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5 year CDS on Bulgaria, Croatia, Hungary and Austria – CDS on Hungary reach a new all time high of 721 basis points – Austria's still rising in sympathy.

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5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – breaking upward now from the small bullish flag built in recent weeks.

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5 year CDS on Romania, Poland, Lithuania and Estonia – CDS on Estonia improve a bit.

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5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – CDS on Turkey are beginning to spike higher.

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Three month, one year, three year and five year euro basis swaps – a very slight dip.

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Our proprietary unweighted index of 5 year CDS on eight major European banks [BBVA (NYSE:BBVA), Banca Monte dei Paschi di Siena (OTCPK:BMDPY), Societe Generale (SCGLF,PK), BNP Paribas (OTC:BNOBF), Deutsche Bank (NYSE:DB), UBS (NYSE:UBS), Intesa Sanpaolo (OTCPK:IITOF) and Unicredito (OTC:UNCIF)] - a small bounce.

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10 year government bond yields of Italy, Greece, Portugal and Spain – yields are rising again. Spain's government has lately been talking about the banks needing € 50 billion of provisions to recapitalize in the wake of their losses from the burst housing bubble. Even that number may eventually prove too low.

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The 9-year Irish government bond yield, the 2 year Greek note yield, and the yield on U.K. gilts and the Austrian 10 year government bond. Austrian yields are now spiking due to Hungary's crisis

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5 year CDS on the debt of Australia's "Big Four" banks – still sedate.


The Antics of Mr. and Mrs. Hildebrand

It was recently revealed that the wife of Swiss National Bank president Phillip Hildebrand was engaged in a highly profitable foreign exchange speculation, buying a big lump of dollars for CHF shortly before her husband's institution flooded the money markets with plenty of CHF from thin air and fixed a "managed peg" against the euro, which caused the Swiss franc's exchange rate to plunge. It seems rather strange that the SNB apparently sees no need to question the propriety of this trade – at least from the point of view of the legal framework as it stands. It is a bit like Hillary's famous trade in cattle futures as it were. Everybody is wondering how it comes that these people suddenly acquire the wherewithal to execute highly profitable trades completely out of the blue. Of course the cattle futures trade was even more suspicious: Kashya Hildebrand (good name for someone cashing in) at least has some prior experience with trading, even if it's been a long time since she had anything to do with it.

As Reuters reports:

“The Federal Council, which elects the governing board of the Swiss National Bank, said it had received information from an unnamed party on foreign exchange transactions conducted during 2011, although it declined to release details and said it had no documents relating to the transactions.

Hildebrand's wife Kashya, a former trader who owns a Zurich art gallery, bought dollars three weeks before the central bank capped the Swiss franc, data leaked by the employee of a private bank showed.

The council said it had instructed Switzerland's audit office to examine the bank accounts of Hildebrand and his family members, but found no evidence of "problematic" transactions revealing use of insider information.

"The Federal Council has no reason to question the validity of the audit findings and has expressed its full confidence in Mr. Hildebrand," it said in a statement.”

As it were, we actually couldn't care less if Mrs. Hildebrand did or did not make her profit (allegedly a tidy $83,000) with the help of inside information or by means of a sudden epiphany as she herself claims - after all, nobody was harmed by her making a profit. We believe insider trading shouldn't be criminalized at all – rather, it should be the subject of contractual agreements between private parties (so that e.g. if you work for a public company, that company can make you sign a pledge that you will refrain from trading on insider information or passing such information on and can hold you liable for damages if you break the contract).

The focus on her alleged misdeed is entirely misplaced. What people should really worry about is that her husband is demonstrably a Keynesian dunderhead whose actions are dangerous for the well-being of Switzerland's economy and currency. Hildebrand seems to believe he can print Switzerland to prosperity and that a strong currency is "bad." Of course he also thinks "deflation" (this is to say, falling prices) is "bad."

As far as we are concerned, we like falling prices. So do all consumers. Imagine if the central bankers of this world had managed to keep the prices of computers where they were 20 or 30 years ago. The PC or tablet you use to read this would have cost you about a million dollars. Yes, it's really bad when prices are falling. Hildebrand is one of the monetary cranks infesting central banks nearly everywhere these days. How Switzerland of all places got saddled with one of those remains slightly mysterious to us.

Addendum 2:

Here is a picture of Ben and the Fat Cats he bailed out that one of our readers sent us:

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A click on the image opens the artist's website.

Charts by: Bloomberg