Analysis: Investors ponder Hungary default risk, contagion

Thu Jan 5, 2012 3:01pm EST
 
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By Sujata Rao

LONDON (Reuters) - A selloff in Hungarian financial markets is forcing investors to weigh the possibility of a default in the European Union state and the risk of contagion to other regional economies.

The rising cost of insuring government and bank debt in neighboring euro zone member Austria because of exposure to Hungary is a case in point.

Hungary needs to find around $16.5 billion this year to repay debt owed to bondholders and the International Monetary Fund but is effectively cut off from global capital markets as growing mistrust in its policies pushes up borrowing costs.

Controversial new laws that are seen as undermining central bank independence and democratic checks have put Hungary on a collision course with the European Union and the IMF, jeopardizing an aid deal.

"Common sense would say a default cannot happen but now we can no longer exclude this possibility. It is a marginal risk, but it is a risk, and cracks have appeared in investor confidence," said Viktor Szabo, a fund manager at Aberdeen Asset Management, which has $7 billion in emerging debt.

Like most fund managers, Szabo does not see a 2012 default as the main scenario and expects Hungary to eventually meet IMF conditions and sign a loan deal. The government said on Wednesday it might moderate some of its widely-criticized policies to please international lenders.

Szabo said he is extremely underweight Hungarian hard currency bonds and the forint.

"The question is how far the market must push Hungarian assets ... It's hard to guess what level of exchange rate and bond yield will make the government change their mind," he said.   Continued...