Now this is interesting in Hungary

The Budapest government saw borrowing costs soar and the currency plunge as traders bet that international authorities may abandon Hungary, letting it become the first European Union country to default on its debts.

The florint fell more than 1pc to a record low against the euro and bond yields soared over 10pc. The Hungarian government, which has defied Brussels by introducing a raft of radical constitutional reforms, called off its plans to swap old debt for new because it would be too expensive.

I don\’t know the details there at all. Only that yields of over 10% when base rate is 7.5% don\’t seem that terrible.

Yes, Hungarian base rate is 7.5%. For they\’ve their own currency you see, the forint.

And according to absolutely everyone a country with its own currency, its own central bank, its own printing presses, can never actually go bankrupt, never actually need to default.

As long as it is borrowing in its own currency that is and these bonds are indeed forint bonds.

So, what is special about Hungary that this \”it can\’t ever happen\” rule doesn\’t apply to them? Or alternatively, maybe the can\’t ever happen rule is wrong?

And if its the latter, then some of the people urging reflation and borrow and damn the bond vigilantes here in the UK have some \’splainin\’ to do, no?

14 comments on “Now this is interesting in Hungary

  1. Tim

    I’ve just been researching this for an article for LondonlovesBusiness. Spoke to two Hungarian economists yesterday and put it to them that the Hungarian government can whirr the printing presses to fund its deficit. Both were adamant this could not happen.

    They said the government does not control the central bank, and the central bank will refuse to print money, even after the new appointees arrive.

    Also, Hungary has so much foreign denominated debt that a depreciation in the forint would be catastrophic.

    Both said printing forints was absolutely out of the question.

    The only solution for Hungary is to borrow from the IMF, and the IMF won’t lend until the constituional issues are sorted out (even Orban admits his reforms are tantamount to a “regime change”).

    http://www.londonlovesbusiness.com/commentanalysis/hungary-hurtles-towards-catastrophe-is-it-the-new-greece-should-we-be-scared/1415.article

  2. A government which controls currency (monetary base) issuance can avoid nominal terms default by issuing new currency to pay interest and principal.

    That does not mean its bond prices will stay high. If existing and prospective lenders fear inflationary default (by “printing”) they are liable to dump the bonds anyway.

    An independent central bank with an inflation target will guard against risk of inflationary default, as would e.g. long-term political stability. The Fidesz party don’t have the latter, and are messing with central bank independence, which is perhaps causing lenders to fear this “default by printing”.

    http://www.bbc.co.uk/news/business-16362662

  3. “And according to absolutely everyone a country with its own currency, its own central bank, its own printing presses, can never actually go bankrupt, never actually need to default” … hmmm, some thoughts occur.

    If I lend you money and you repay me with what has become funny money, then I will consider you to have defaulted – and I won’t get lend again.

    If your money becomes funny money, then you can’t buy things with it – even if you print trillion ruritan notes (especially if you get to printing trillion notes). Once the money is broken then you simply cannot exchange large quantities of it for hard currency, nobody is buying your currency, so you can’t buy off foreigners.

    As a sovereign government you can never be distrained upon (by definition, else you’re not sovereign) – so you can never go bust as in have baliffs cart away everything you owned in white vans.

    So yes and no, a sovereign govt can never go bust, but might find itself unable to acquire any hard currency.

    Hungary has significant exports, so they will always be able to buy their most dire needs from abroad.

  4. Hungary’s government is attempting to take over its central bank. So far it has failed on legal grounds but it hasnt given up, and as it is moving rapidly towards a dictatorship I have no doubt that it will eventually succeed. The intention must surely be to gain political control of money creation. Hungary has had hyperinflation before. Once the government has control of the central bank, just watch it happen again.

  5. Short memories though Johnny. Real returns on gilts were negative for lots of post-war period and yet people willing to lend to UK govt for 50 years for something like 3%.

  6. Frances Coppola – “Hungary has had hyperinflation before. Once the government has control of the central bank, just watch it happen again.”

    The Bank of England used to be controlled by the government and while the economy was really badly run, I don’t recall hyperinflation in the 1960s. Governments may want to control the central bank for some other reason apart from debauching the currency.

    I find it interesting that this is caused by various international organisations, the EU first and foremost, saying they won’t bail out a politically unacceptable government. So we are going to get another coup a la Greece or Italy, but this time it is explicitly on political grounds. The Hungarians may want crypto-Fascists in office but the EU is not buying it. It makes me wonder if Berlusconi went for the same reasons. The quality of Italian governance doesn’t seem to have improved that much to me.

  7. CharlesOJ (#1) said “Hungary has so much foreign denominated debt that a depreciation in the forint would be catastrophic”

    There’s a similar problem in the UK, which doesn’t seem to be reported much, that a large part of our national debt is index-linked – £258bn out of £1,150bn (nearly a quarter).

    So in a similar way, if we print money to inflate ourselves out of trouble, it doesn’t work very well.

  8. @Richard, the solution to the linker problem will be a redefinition of the official rate of inflation.

  9. SMFS

    1)The first comment of mine that you quoted was relevant, actually, even though you ignored it: “Hungary has had hyperinflation before”. Leopards and spots…..

    2) Why on earth should the international community bail out a country that it has already bailed out once and which has simply made exactly the same mistakes all over again?

    3) It seems to have escaped your attention that Hungary is not a member of the Euro. Comparing it to Italy therefore misses the point. Because of the Eurozone crisis everyone is paying lots of attention to sovereign debt yields, but as Tim points out those actually aren’t the major issue. The major issue is the collapse of the forint, which as CharlesOJ pointed out is catastrophic for an economy with as much foreign-denominated debt as Hungary has.

  10. It goes without saying that the technocrats’ “solution” to any hyperinflation in Hungary will be immediate entry to the Eurozone. Even if officials didn’t force it, we would probably see dollarisation creep in through the back door as more and more businesses start accepting Euro notes and coins.

    I’ve heard the argument made (though I don’t necessarily agree with it) that the USA, Japan, and the UK can get away with QE simply because of their sheer size and the limited availability of alternatives. Hungarians can drive across the border to Austria, Slovakia, or Slovenia to pick up Euro notes and coins, or to open bank accounts; the Japanese and Brits (NI excluded) cannot.

  11. Frances Coppola – “1)The first comment of mine that you quoted was relevant, actually, even though you ignored it: “Hungary has had hyperinflation before”. Leopards and spots…..”

    Great. Another brilliant start to a thread. How is it relevant? You mean that the only reason a government would want to control a central bank, given their history of hyperinflation, is so that they can do it all again? Unlike Germany it seems where hyperinflation has caused a deep seated revulsion against coming even close again.

    “2) Why on earth should the international community bail out a country that it has already bailed out once and which has simply made exactly the same mistakes all over again?”

    Greece has been in default for half the years it has been independent from the Ottomans. And yet we are going to bail them out. Italy has also continued to make the same mistakes all over again – and the whole argument made by a few people here is that Southern Europe needs to be bailed out and the Germans become more like the Greeks so that the Greeks do not have to stop making the same mistakes all over again.

    But I agree with the general principle that bail outs should come with strict conditions that require structural reforms. Just like those nice Germans are demanding. As I have been saying for a while now.

    “3) It seems to have escaped your attention that Hungary is not a member of the Euro.”

    That is utterly irrelevant. The EU seems to be the people trying to screw them. As they tried with Austria when they elected a government they did not like. The justification for a bail out, such as it is, remains either way – the Austrians in particular are over-exposed to Hungary’s problems. If the Hungarians go down, so could a few Austrian (or even German) banks and so to defend the European economy as a whole we need to defend Hungary’s. It is not a sensible argument without reform, but they probably do have a point. However it does look like the new Hungarian government is so unacceptable to the Great and the Good that they will let it collapse.

    “Comparing it to Italy therefore misses the point.”

    No it doesn’t. Not when you actually read what I said.

  12. SMFS

    1) The evidence across the world – Latin America, for example – is that many countries that experience hyperinflation do not change their spots, so go on to have further episodes of hyperinflation from time to time. Germany is unusual.

    2) Greece – no, we aren’t bailing out Greece. We’re bailing out German and French banks, and propping up Germany & France’s currency. Greece’s economy is being destroyed.

    Structural reforms do need to be conditions of bailout. I have never said otherwise. But that includes structural reforms in countries who are running beggar-my-neighbour policies.

    3) The reason why the European Union (and probably the IMF as well) will bail out Greece and Italy but might be much less likely to bail out Hungary is of course the Euro. We are propping up a failed currency that is unfortunately used by a considerable number of countries. Hungary’s forint is only used by itself. It can collapse without affecting nearly so many people. Yes, Erste Bank and a couple of Italian banks are potentially affected – but they are unloading Hungarian debt at a rate of knots. Anyway, they are banks, the ECB (and SNB for CHF-denominated Hungarian debt) will bail them out. Hardly the same as the economies of 17 countries collapsing.

    So comparing Hungary to Italy DOES miss the point. Completely.

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