“Investors voted confidence to the Széll Kálmán Plan, but the implementation is just as important, Buda-Cash deputy commercial director Sándor Német told the Budapest Business Journal. Therefore, CDS spreads are not expected to decline further until the majority of the reforms are carried out.”
“Despite the potential risks, I do not see the softening of the reforms,” Német said. Key risks include social tensions, such as the current conflicts with police officers and doctors. Thousands of firemen, police officers and soldiers protested in April against government plans to eliminate the early retirement system for law-and-order officials. In turn, young doctors are threatening of leaving the country, unless they get a wage increase.
Hungary’s CDS current CDS prices stand at around 260 basis points, down from over 400 bps prior to the announcement of the government’s plans to reduce expenditures by HUF 600-800 billion by the end of 2012. “This reflects investors’ confidence in Hungary amidst the eurozone debt crisis,” said Német. The deepening of the crisis during the past few weeks resulted in only a slight increase from this year’s lowest level of 240 bps, he added.
Hungary’s current CDS prices suggest a significantly better market perception of default risk than that of Portugal with CDS spreads hovering around 680bps, Német said. He pointed out that while the two countries’ sovereign ratings are similar, CDS spreads suggests that the risk of Portugal’s bankruptcy is three times higher than that of Hungary.
A CDS contract valued at 260bps means that the cost to insure every €10 million worth of bond exposure against default is €260,000 a year for the benchmark five-year horizon.
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