Hungary would face a further steep surge in bond yields and a potentially deep recession this year if it failed to come to terms with the IMF and the EU over an external financial backstop, emerging markets economists said on Wednesday.
In a research note released to investors in London, analysts at BNP Paribas said the recent price action on the forint and Hungarian bonds suggests that markets are increasingly pricing in the possibility of no IMF/EU financial aid package for Hungary.
However, "we continue to think that, for Hungary, there is no sensible alternative to such a program and thus we still believe that, in the end, an agreement between the Hungarian government, the Fund and the European Commission can be reached".
Without a €15-20 billion program, Hungary "would find it difficult" to repay maturing external sovereign debt or refinance it on the market at a reasonable cost.
In the scenario of no external safety net, "we would expect further rating downgrades ... triggering foreign capital outflows and pushing yields up". Further yield and spread widening by 200bps would suggest EUR/HUF rising to the 340 levels.
Under such a scenario, the GDP contraction in Hungary could exceed 3% this year "versus our current forecast of an approximately 1% decline", BNP Paribas said.
Meanwhile, default insurance costs on Hungary’s sovereign debt surged to record highs on Wednesday, also driven up by uncertainties over the IMF/EU talks.
According to CMA DataVision, a major CDS market data monitor in London, Hungary’s five-year credit default swaps traded around 710bps late in the session, up sharply from the 650bps previous close.