Given Hungary has been our pet subject in relation to the study of systemic risk diagnosis (Modicum of relief):
We thought it would be appropriate, to follow up on our "Hungarian Dances" post with some update on the situation relating to the ongoing stand-off between Hungary and the EU and IMF and, of course, credit conditions.
According to Unicredit and as reported by Bloomberg, Hungary may not obtain aid from the IMF and the European Union before the fourth quarter. It would only happen before that date under severe market drop.
Also reported by Agnes Lovasz, from Bloomberg: East European Deleveraging May Hurt Economic Growth, RBS Says:
"Western European lenders will continue to reduce their eastern exposure to meet stricter regulations, curtailing access to credit and economic growth, Royal Bank of Scotland Group Plc said.
As we have long argued in various conversations, it is after all a game of survival of the fittest. In fact in our conversation "Hungarian Dances", Deutsche Bank already had highlighted the five most vulnerable countries in EMEA in December 2011:
"EMEA dominates our list of the most vulnerable countries. Five countries (Hungary, Ukraine, Romania, Poland, and Egypt) show up as highly vulnerable, though for different reasons. Egypt’s underlying vulnerabilities, for example, are fiscal first and external second. Ukraine’s risks are mostly external. Hungary’s vulnerability reflects a combination of risks in all four areas."
Therefore it wasn't really a surprise to us to learn about the fall of the Romanian center-right government on the 30th of April as political turmoils sank the currency, the Leu. As reported by Irina Savu in Bloomberg:
From the same article:
We believe a credit crunch is unavoidable in both countries:
"The ratio of non-performing corporate loans reached 17 percent at the end of 2011, a 4 percentage point increase from a year earlier, the central bank said. Including restructured loans, about a quarter of corporate loans were impaired, the bank said. The ratio will probably rise through 2013, the central bank said.
The ratio of non-performing household loans rose to 13.1 percent in 2011 from 9.5 percent in 2010 and will probably peak this year, according to the report." - source Bloomberg, Zoltan Simon - 26th of April 2012.
Hungary Economic Sentiment - Erste Bank indicator - source Bloomberg:
Rising Non-performing loans in Hungary now at 13.30% - source Bloomberg:
Troubles ahead for Hungarian banks given the rise of Non-performing loans is not accompanied by a rise in provisioning, on the contrary....down to 45% - source Bloomberg:
The ill-fated currency non-performing mortgages plaguing Hungarian households are still rising (in HUF millions) - source Bloomberg:
The impact of the start of the bailouts talks can be seen on both the Hungarian bond markets as well as on Hungary's sovereign CDS market - source Bloomberg.
As well as on EURHUF exchange rate - source Bloomberg:
As a reminder from our conversation "Modicum of Relief", Erste Hungary's lending capacity is deeply impaired by:
-loan-to-deposit ratio of 192%, the highest in the sector.
-the proportion of non-performing loans in the bank's portfolio rose to 20.5% in 2011 from 11.7% in 2010 (The rate in the retail portfolio increased to 16.3% from 11.4%, while the rate in the corporate portfolio climbed to 29% from 12.5%
We argued at the time:
"Rising non-performing loans is a cause for concern as well as rising loan-to-deposit ratios."
Erste Group AG published their results on the 30th of April, and not surprisingly, their results are affected by bad loans in both Hungary and Romania. Erste has therefore cut its outlook as reported by Boris Groendahl in Bloomberg:
"Erste Group Bank AG said bad loans in Hungary and Romania will remain a drag on profit for longer than it predicted after they cast a pall over first-quarter results at eastern Europe’s second-biggest lender.
Bad debt charges will be about 2 billion euros ($2.7 billion), or about 10 percent more than it predicted Feb. 29, as asset quality continues to worsen in Hungary and Romania, the Vienna-based lender said in slides prepared for an analyst meeting in London today. That also means operating profit will be only stable this year, rather than rising “slightly” from 3.63 billion euros in 2011."
In both countries, about one in four loans on Erste’s Hungarian branch loan book is delinquent. Erste had its first loss since at least 1988 in 2011 because of write-downs in these two countries.
From the same Bloomberg article relating to Erste Bank's results:
"Risk provisions rose 26 percent to 580.6 million euros, more than the 22 percent rise analysts in the Bloomberg survey had estimated. The bank booked extra charges on corporate and real estate loans in Romania, and on Hungarian foreign-currency mortgages. Erste had predicted Feb. 29 that 2012 charges would decline to 1.8 billion euros from 2.27 billion euros last year."
Once again analysts are on the ball...Nice.
As our good credit friend indicated back in March 2012:
"Credit dynamic is based on Growth! No growth or weak growth can lead to defaults and asset deflation."
Any similarities with actual events will of course be purely fortuitous, as the saying goes...
It is as well not a surprise to hear that recently the Hungarian government has been planning to levy a tax on phone and internet usage as reported by Zoltan Simon in Bloomberg:
On a final note, the ongoing delay for Hungary in securing a much needed bail-out funds linked to their ill-fated private sector woes plagued by currency mortgages issued by European banks is choking the economy - source Bloomberg:
"He who rejects restructuring is the architect of default." - Macronomics.