Saturday 26 May 2012

The EU’s new vulnerability: central Europe

7 January 2012

As if there weren’t enough fires to put out already within the eurozone, there’s another one flaring up outside the common-currency area, in Hungary. Budapest may well be the first EU government to default, pipping Athens to the dubious honour. Yields on Hungarian 10-year debt have soared to 10.7 per cent, driving up yields in neighbouring Poland and the Czech Republic. The next vulnerable flank of the EU has been exposed — central Europe.

As usual with the EU, politics lie behind the economic trouble. There’s a touch of irony in this case: Hungary’s current round of debt trouble (it’s already on an IMF loan) is partly because the EU refuses to support the constitutional changes that increase prime minister Viktor Orban’s control over the Hungarian central bank, judiciary and press. Where in other cases the EU machinery has been accused of reducing the democratic processes of member states, this time the financial fracas is due to EU basic law that seeks to ensure the autonomy of key institutions. Still, the core problem remains — EU ties are fraying because its members cannot or will not meet the common political and economic statutes.

Hungary has to roll over some €5 billion of external debt this year. It’s supposed to sit down with IMF and EU officials later this month to discuss a refinancing agreement. A European Commission spokesman yesterday said talks are no longer on the cards, though Hungarian officials this evening say they are willing to 'negotiate' regarding the new central-bank laws.

The Budapest government already has had to cancel a bond swap auction and slash the quantity of bonds offered at a sale of short-term debt. Even with decreased supply, yields on Hungarian one-year bills rose to a dizzying 9.97 per cent (yields were around 7.9 per cent in the previous auction).

Central and eastern Europe countries are already quite liable to a credit crunch – these were the areas that German and French banks cut their lending to, in trying themselves to remain liquid given exposure to the PIGS. The banks still holding significant Hungarian debt include Austrian and Italian institutions, according the Telegraph. Meanwhile, not only has the forint hit an all-time low against the euro, the zloty is tumbling as well. Hungary's credit-default swaps, at a record 690 basis points, are causing Austrian CDS to blow out as well.

And, speaking of PIGS, Spain has to ensure 50 billion euros of new bank provisions, while Greece’s aid timetable with the EU-IMF has been pushed back three months.

It seems the question now is not so much, ‘will there be a debt contagion in the EU?’ but rather, ‘where will this contagion come from?’

More articles from: Clarissa Tan | this section

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