COMMENT: Is Hungary the next Iceland?

By bne IntelliNews October 17, 2008

Neil Shearing of Capital Economics -

• The turmoil in global markets has raised concerns about a funding crisis in Emerging Europe, with some investors fearing that Hungary could be the next Iceland. In fact, Ukraine appears the more vulnerable to a balance of payments crisis, although risks also exist in the Baltics, Balkans and Turkey.

• We have been warning about a hard-landing in parts of Emerging Europe for some time. In contrast to most of Asia and large parts of Latin America, some countries have been running huge current account deficits. In other words, they have been borrowing from abroad in order to finance increases in standards of living. This in turn makes them vulnerable to a global liquidity crunch. The steep falls in Hungarian markets suggest that investors believe that it is most exposed to a funding crisis. But is this justified?

• A country's dependence on foreign finance is a function of its current account deficit plus the size and structure of its external debt. As we have noted before, the Baltics and Balkans run the largest current account deficits (around 15-20% of GDP), while the deficits in Ukraine (c.10% of GDP) and Turkey (c.6% of GDP) are also pretty hefty. Meanwhile, Hungary's current account deficit is smaller (4.5% of GDP).

• Unsurprisingly, those countries with the largest current account deficits also have the largest stock of external debt (see Chart 1). But it is not so much the level as the structure of a country's external debt that matters. In particular, a large share of short-term debt (with a maturity of less than twelve months) increases a country's immediate dependence on foreign capital. The 'external financing requirement' (the sum of its current account deficit plus its short-term external debt) is therefore the best measure of an economy's overall dependence on foreign funding.

• As Chart 2 shows, Hungary does have a reasonably high external financing requirement relative to GDP. This reflects a high external debt burden caused by the large current account deficits it ran in the early part of this decade. But other countries - notably the Baltics and Balkans - have much larger funding gaps as a share of GDP. And in plain dollar terms Turkey has a huge external financing requirement. (By way of reference Thailand's external financing requirement was 35% of GDP just before the Asia crisis in 1997.)

• Of course, this says nothing about the ability of countries to attract finance. Scandinavian banks will continue to play a critical role in funding deficits in the Baltics. Meanwhile, EU membership may help shore up investment in Central Europe. In fact, once political risk is factored in, Ukraine could be most vulnerable to a balance of payments crisis, despite the fact that it's overall external deficit is smaller.

• The good news is that the IMF has ample funds to bail out the Ukraine, or indeed any country in the region that comes under funding pressure: it has total loanable funds of $250bn, more than one-third of the combined financing requirement of Emerging Europe. What's more, early intervention could help avoid the poisonous cocktail of currency devaluations, spiraling inflation, sharp increases in bond yields and steep drops in output that tend to typify balance of payments crises.

• The bad news is that even if the worst case scenario is averted, GDP growth in the 'super-deficit' countries is likely to slow sharply next year. With the exception of the Baltics, outright recession is not yet our central forecast for these countries. But it is looking more possible by the day.

Neil Shearing is Emerging Europe Economist of Capital Economics


Send comments to The Editor


Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss