Hungary's improving CDS spreads don't change the fact that the situation is very precarious.
Hungary’s CDS spreads may be improving – down to 468 basis points yesterday, from over 700 in early January – suggesting less risk of a default, but the situation remains precarious - in line with its ECR score trend.
Even the Organization for Economic Cooperation and Development cannot believe the government’s forecast of 0.1% real GDP growth this year. The OECD’s latest prognosis (Hungary: economic forecast summary, May 2012) suggests a 1.5% decline, which is bad news for the government as it deals with its deficit, and a public debt burden approximating 80% of GDP.
According to research trip notes passed on to ECR by Pasquale Diana, CEE economist at Morgan Stanley, and one of ECR’s contributors: “The IMF mission left Budapest, and it seems to us that while official commentary is overall broadly encouraging, there is still plenty of work to do."
“As far as we can see, these are the main points of disagreement between the Fund and Hungary at this stage:
The flat tax and its structure, which the IMF asked to be modified;
The macro assumptions behind the 2013 budget draft, which the Fund thinks are too optimistic (as the official IMF press release also suggests);
The Financial Transactions Tax, criticized also by the ECB this week. Chief negotiator Varga said he awaits suggestions from the EC on how to change the current tax, PM Orban sounded a bit more cautious on his intentions to amend the bill;
The role of the Fiscal Council (probably, we think, though not mentioned explicitly)."
“It seems to us that the negotiations will be bumpy and uncertain at times. We still expect a deal to be made (in late September, with risks of a later agreement), after which Hungary’s risk profile is likely to improve, which would allow the NBH to start cutting rates aggressively (by at least 150bp cumulatively in our forecast).”