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Hungary's News Means Pressure for HUF

NEW YORK ( BBH FX Strategy) -- There were two notable events for Hungary since the start of the week: The results of Hungary's first auction under the new two-year loan facility, and the resignation of President Pal Schmitt, a supporter of the ruling Fidesz party. Neither event had an initial market impact, but both could have potential consequences for Hungarian assets going forward.

The take up for the first auction of the Hungarian mini-Long Term Refinancing Operation facility was lower than expected at HUF 56 billion (expectations were for as much as HUF100 billion). As widely reported, the weak demand was attributed to the comfortable cash position by local banks and their reluctance to accept the conditions associated with using the facility.

The Hungarian capital, Budapest

Recall that banks borrowing from the facility must keep gross outstanding loans to the corporate sector at or above the December 2011 levels during the two-year term of the loan. That said, we think the establishment of this facility was an important gesture that will be much appreciated if funding conditions tighten once again.

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The fact that banks have ample liquidity but many are not willing to commit to higher lending is hardly a vote of confidence for the Hungary economy. Data of Hungary has been mixed, but the last PMI reading showed a sharp increase to 56.8, the highest since February of last year.

Also of note, last year's budget deficit target is being hotly debated. To start, it was inflated by one-off items such as a large transfer of private pension fund assets. But critics also claim that the adjusted deficit of 2.43% of GDP was also inflated through accounting tricks, which allowed it to beat the targeted deficit of 2.94% of GDP.

The resignation of President Schmitt -- accused of plagiarism during his Ph.D. thesis -- represents a blow to Prime Minister Orban. The ruling Fidesz party holds a comfortable majority in the parliament, but this event could reduce Orban's personal support within the party.

The key question is whether this will impact the IMF negotiations in any way. We are inclined to think a weaker Orban, with less freedom, is more likely to give in to IMF/EU demands rather than double down on his antagonistic posture. We prefer to wait until the new president is announced on April 16 to draw any conclusions.

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