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No Greek tragedy expected, for now

If Greece actually does exit the eurozone, the region is not expected to suffer any heavy direct impact. But it is hard to foresee the knock-on effects to Hungary from potential turmoil elsewhere in Europe.

With a possible Greek exit (the so-called Grexit) from the Eurozone approaching, forecasts and scenarios are emerging from analysts about the possible effects it might have on member states’ economies. As for Hungary, and Central Eastern Europe in general, impacts may vary depending on the vulnerability of the various economies, but in general, analysts say that damage would most likely not be derived from direct economic relations but through the economies of other Western European countries.

Ákos Kuti, senior analyst at Equilor, told the Budapest Business Journal that he could see no reason for a direct impact on the region’s economies and stock markets. “Indirect effects, however, can only be estimated, as confidence in the unity of the eurozone would be at jeopardy if the Greek economy collapsed,” Kuti said. He explained that this would cause capital outflow from the region, thus interest and yield levels in the eurozone would increase, which in the end would hinder economic growth across the continent. This would be especially painful for Hungary, as the economic dynamics of Germany – the country’s most important business partner – might suffer a setback as well, which would eventually slow down Hungarian growth. Such indirect impacts were seen as a result of the Russian embargo in 2014, Kuti added.

Negative stock market movements would result in higher yields on Hungary’s state bond market and, in addition, the capital outflow would seriously weaken the Hungarian currency in the short-term.  Stock markets would experience selling pressure as an indirect effect.

“Building concerns surrounding Greece have caused a weakening of CEE local markets, which have moved in sympathy with peripheral spread widening,” London-based economists and strategists at Morgan Stanley said in a research note on June 16. “With this CEE sell-off being more closely related to sentiment channels, and not fundamental channels of contagion, we think value is being created in CEE currencies, and in particular HUF.”

The research note added that macro links between Greece and Hungary are “not of major concern”, and with Greece having been in recession for several years the importance of Greek trade has been declining.

MNB moves could protect forint

“Of course, repercussions of a Grexit could go beyond the macro impact on Greece, and onto the broader euro area, which the forint would clearly be more sensitive to,” the note said.

However, even Morgan Stanley’s European economists and strategists believe that a Grexit is now “less likely to result in broad contagion, with stronger firewalls, less direct exposure and better EU fundamentals all providing a cushion”.

With the longer-term eurozone outlook not negatively impacted, in their view, the outlook for the forint should not be too severely affected.

They also noted that direct banking/financial links between Greece and Hungary are also not of major concern to the HUF outlook, though this is of more significance to SEE economies.

In the meantime, the Monetary Council of the National Bank of Hungary (MNB) has decided to replace the central bank’s two-week deposits with three-month, fixed-rate deposits as its main sterilization instrument, from September 23. The two-week deposit will remain part of the MNB’s toolbox, but in future the central bank will place restrictions on quantity, using the auction method. Through the measure, the MNB aims to make purchases of government securities more attractive for banks, shifting their financing to the state instead of the central bank, while also increasing the credit supply to the real economy.

In the longer run (in the next one to two years), the new tool will significantly decrease the vulnerability of the Hungarian economy, due to the increase in the share of domestic financing, said Kuti. He emphasized, however, that until then, massive anomalies could be expected, because banks and investors need to prepare for the new financing structure. This might result in several investors leaving the Hungarian bond market, which could cause higher yields and a weaker forint in the following few months, Kuti summed up.