Mish's Global Economic Trend Analysis

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Hungary Downgraded to Junk; Expect Defaults on Public and Private Debt, Especially Mortgages Posted: 21 Dec 2011 04:52 PM PST A few days ago I saw a report that the IMF was breaking off negotiations with Hungary regarding a debt package. I knew what was next: a weakening currency and more downgrades. The downgrades came in spades. Bloomberg reports Hungary Hit by Second Debt Downgrade to Junk on Orban's Policies Hungary lost its investment-grade rating at Standard & Poor's, the second such downgrade in a month, increasing pressure on Premier Viktor Orban to obtain an International Monetary Fund backstop and reverse policies. The country's long- and short-term foreign- and local- currency sovereign credit ratings were cut one step to BB+ from BBB-, the company said yesterday in a statement. The IMF and the European Union suspended talks over an aid package to Hungary, citing concerns about the government's plans for a central bank law they say may curb monetary-policy independence. Hungary will have the highest debt level and slowest economic growth among the EU's eastern members next year, the European Commission forecast on Nov. 10. IMF backing would bolster policy credibility, S&P said. The forint weakened to 307.01 per euro as of 11:21 p.m. in Budapest yesterday from 300.74 on Dec. 20. It has lost 13 percent since June 30, the worst performance among more than 170 currencies tracked by Bloomberg. Hungary's five-year credit-default swaps, which measure the cost of insuring government debt against non-payment, traded at 572 basis points yesterday, the ninth-highest in the world, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers. The central bank raised its benchmark interest rate to 7 percent on Dec. 20 from 6.5 percent, which was already the EU's highest. Policy makers said they may boost borrowing costs further if risk perception and the inflation outlook deteriorate "substantially." Orban shunned IMF aid after taking office to protect what his government called "unorthodox" measures from oversight, including the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to control the budget, which had a deficit of 182 percent of the Cabinet's full-year target at the end of November. Hungarian Forint vs. the Swiss Franc and the Euro Please consider the following chart of the Hungarian Forint vs. the Swiss Franc and the Euro. click on chart for sharper image Forint Falls After Downgrades The Wall Street Journal reports Hungarian Forint Falls After S&P Downgrades Rating To Junk The Hungarian forint tumbled sharply against the euro, dollar and Swiss franc Wednesday after Standard & Poor's cut Hungary's rating into junk territory. Hungary's currency slid to a one-week low against the euro, though in very thin trading, following the announcement. The euro rose to HUF306.42, from the HUF303 area before the ratings downgrade, according to CQG. The euro later steadied itself around the HUF305.50 level. The dollar, meanwhile, jumped 1.8% on the day against the forint, and the Swiss franc advanced 1.4%. Investors have largely avoided Hungary's currency, as the country grapples with high levels of foreign currency debt, and has yet to obtain financial assistance from the European Union and International Monetary Fund. The IMF and EU halted preliminary talks on back-up financing to Hungary last week, after a new central bank bill raised concerns about the central bank's independence. The Hungarian government recently proposed the central bank bill, which would merge the central bank with Hungary's financial markets regulator, and would also designate a third deputy governor and raise the number of members in the Monetary Policy Council. Expect Defaults on Public Debt A junk rating on public debt by the S&P does not come easily. You have to really try to get it. Moreover, you have to really try hard to get the IMF to walk away from debt deals. Bear in mind it is most always correct to refuse money from the IMF. Iceland is a classic example. However, the policies of Hungary are extremely questionable to say the least. Hungary had plans to join the Euro in 2007 or 2008. The target date is now 2020. Will the Euro even be in existence then? Expect Defaults on Private Debt Given massive amounts of private loans, primarily mortgage loans, I see little hope for those loans to be paid back, except for the small percent capable of refinancing on agreed upon discounts, right here right now. Who would be dumb enough to take out loans in Swiss Francs on Hungarian properties? Good question. The answer, amusingly enough includes economics professors, based on their models. Please consider "Decision was rational. I put it into a model" says Hungarian Economics Professor who took Mortgage in Swiss Francs, then Clobbered on 40% Currency Move Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Investigating the NAR's Seemingly Incredulous Statement on the Accuracy of Local Housing Data; Discussion with Calculated Risk on "Where to From Here" Posted: 21 Dec 2011 11:14 AM PST A statement by Lawrence Yun, chief economist for the National Association of Realtors as listed in a report on existing home sales caught my eye today. "From a consumer's perspective, only the local market information matters and there are no changes to local multiple listing service data or local supply-and-demand balance, or to local home prices" said Yun. On the surface, the statement seems incredulous. How can the national data be completely screwed up, in need of major revisions, if the local data is accurate? I had a chat with Calculated Risk today regarding that statement by the NAR. Calculated Risk explains various ways the national data can be messed up even if the local data is accurate. It has to do with procedural errors in NAR methodology, extrapolating local data to national trends. Major Procedural Errors Sampling Error - Not all local data was used to estimate national numbers Size Error - Local areas changed in size over time. If the size of a local office changed, that affected extrapolated results Benchmark Error - Population figures were based on the 2000 census. 10 years between census reports is a lot of time. FSBO Changes - The NAR had difficulty extrapolating trends given huge changes over time in "For Sale by Owner" homes going off then back on NAR listings. Calculated Risk covers the revisions (with a nice set of charts), but not the discussion above in his post Existing Home Sales Revisions When Did Housing Peak? In our discussion, CR thinks as do I the Summer of 2006 top as shown by Case-Shiller is inaccurate because of Case-Shiller misses incentives such as "free" garages, pools, landscaping, and other upgrades and incentives that started in summer or Autumn of 2005. Moreover, Case-Shiller does not include condo sales, and condo prices started crashing summer of 2005. I have the peak Summer of 2005, CR has the peak somewhere between summer of 2005 and Spring of 2006. We both agree it was a rolling peak that started slowly, then spread like wildfire mid-2006. ECRI's Recession Call and Track Record I also chatted a bit with Calculated Risk on the ECRI's recession call. CR brought the subject up, not me, and he is in general agreement with my interpretation in A Look at ECRI's Recession Predicting Track Record In regards to a double-dip or back-to-back recession ideas, so far CR has been correct. He did not see a recession in 2011 and one of the reasons was investment in real estate is at or near the bottom and will no longer be a subtraction to GDP. Indeed housing was a net addition to GDP this year, primarily because of multi-family. Where to From Here? In regards to how long this will play out, I think a decade. CR is a bit more optimistic but shadow-inventory (REOs and foreclosures not yet listed) places downward pressure on home prices now. As prices bottom and start to rise, those hoping to get out at higher prices will add to further supply down the road. Once housing prices bottom, it will not be a mad dash to new highs. "Someone who bought a house for $1 Million who can now only get $500,000 will likely not get back to even in our lifetimes" says CR , adding with a presumed grin, "it certainly depends on how old someone is now". Let's just call it decades, admitting "local conditions can vary" and leave it at that. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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