Is Hungary Suffering From Debt Deflation?

For the experts at BCA Research, the answer is yes...debt deflation plagues Hungary.

According to the US Global Investors,

``Bank Credit Analyst research highlights that Hungary has been in a classic debt deflation, as its nominal GDP has been contracting while government borrowing costs have held above 6 percent. Hungary’s domestic demand has been contracting for three years and the current government is planning to reflate via massive interest rate cuts, fiscal spending, and a weaker currency."

However, we see Hungary's condition in a different light, if not the opposite circumstance.

While it is true that Hungary has been in a deep recession, as manifested by the steep decline in GDP as measured in both annual and quarterly changes, (chart courtesy of tradingeconomics.com), inflation as measured by price changes in consumer price index has been in positive zone and rising!

And it is not just in Hungary, but positive inflation is true for most of Europe, as shown in the above chart courtesy of Financial Times Blog on Money Supply, as of March. The only exception is in the Baltic states (but this has already reversed based on updated statistics).

The following is an updated chart on Hungary courtesy of tradingeconomics.com.

Fundamentally, we see the same dynamics unfolding; while Hungary's recession has been accompanied by RISING joblessness (upper window), inflation has also been RISING (lower window)!

And Hungary's currency has been falling against both the US dollar (upper window) and the Euro (lower window).

The next chart courtesy of yahoo finance.

This is in sharp contrast to the peak of the crisis in 2008, where the forint surged against both major currencies!

Then, the rising forint was symptomatic of debt deflation. Now it seems an entirely different story.

To add, while Hungary's equity bellwether the Budapest Stock Exchange fell by 3% this week on an apparent "gaffe" by the newly sworn administration, on a year to date basis, the Budapest index is still marginally up (by about 2%), and is still about 100% up or double compared to the March 2009 lows.

So all these hardly resembles a Fisherian debt deflation environment. Low bond yields in a recession doesn't automatically account for debt deflation.

Besides, Hungary has managed to turn her streak of current account deficits into surpluses.

So this should hardly make Hungary's conditions parallel to Greece's predicament. Yet Greece, like Hungary, hasn't also been suffering from debt deflation but from 'stagflation' as we have previously shown.

In November 2008, the hard hit crisis stricken Hungary received $20 billion in rescue money from the IMF, EU and the World Bank.

Meanwhile, IMF officials are set to meet with Hungarian officials early next week. The country still has an open credit line of about $2 billion dollars, according to the AP.

Bottomline: Hungary's conditions doesn't seem anywhere like debt deflation or resembles little of Greece's debt crisis. However, unless present trends make a volte-face, both Hungary and Greece appear to be in a mild stagflation.

A Buffet Of Negative News Haunts Major Financial Markets

Major financial markets seem to be either in a state of confusion (looking for anything to justify current actions) or are have been seeing widening of cracks that may turn into a collapse.

While yesterday's news where the sharp decline in Wall Street was linked to anaemic job data, in Europe, market anxiety has been allegedly from Hungary's politics.

This from Bloomberg,

``Credit-default swaps on sovereign bonds surged to a record on speculation Europe’s debt crisis is worsening after Hungary said it’s in a “very grave situation” because a previous government lied about the economy...

``Hungary’s bonds fell after a spokesman for Prime Minister Viktor Orban said talk of a default is “not an exaggeration” because a previous administration “manipulated” figures. The country was bailed out with a 20 billion-euro ($24 billion) aid package from the European Union and International Monetary Fund in 2008."

Bespoke Invest rightly points out that it isn't Hungary, but Spain which appears to be feeling the heat, as shown by the activities in the sovereign Credit Default Swaps markets.

Bespoke Invest writes,

``Sovereign debt worries in Europe have been elevated for a couple of months now, and today Hungary moved into the crosshairs. Sovereign debt default risk as measured by 5-year CDS prices has spiked for Hungary and the countries surrounding it today, but default risk for this region still remains well below levels seen in late 2008 and early 2009. The first two charts below of 5-year CDS for Austria and Hungary since 2008 highlights this. Greece and Portugal default risk remains elevated as well, but at the moment it is still down from its recent peaks. France also remains elevated, but it is still below highs seen in early 2009. The same can't be said for Spain, however. Spain default risk reached a new crisis high today, taking out levels seen prior to the trillion Euro bailout. And Spain matters much more than Hungary."

So like in a buffet, the link between bad news and falling markets seems a matter of choice. Take your pick: US Jobs data, Hungary or Spain? Or perhaps, the latest fashion of lengthy hemlines hold the key?