May non farm payrolls +431k turned out to be lower than consensus and worse, most of the increase were made up from census job, rather than from private sector.
Euro fear is getting deeper. It's about Hungary. Euro tanked 1.6% during the session and moved below 1.2 for the 1st time since 2005.
Over the weekend, some positive progress on oil spill is reported BP. Its cap system was reported to be capturing 90% of the crude oil gushing from the crack at the sea bed. Should be a good sign on the speculative position on BP and Transocean. Will see on Monday.
Anyway, Hungary shouldn't be the last one in this European domino show which began being played out in March. I still remember vividly the troubles with Ukraine, Turkish banks in the mid of banking crisis in 2009... Hungary is weak, others may not be able to hang on for much longer either...
From Wiki:
Hungary:
- Capital: Budapest (beautiful place. one of the top 15 tourist destinations in the world)
- population: 10m
- GDP 2009: 130b
- joined EU in May 2004
- Privatization wave: The PM started the austerity program in 1995. The government privatization program ended on schedule in 1998: 80% of GDP is now produced by the private sector, and foreign owners control 70% of financial institutions, 66% of industry, 90% of telecommunications, and 50% of the trading sector (doesn't look really pretty to me)
- Real wage growth was negative from 2007. in the midst of 2008 banking crisis, the Hugarian National Bank raised interest to 11.5% and Hugarian Government took a 25.1b rescue package from IMF, EU and World Bank.
Seekingalpha/David White
Apparently a significant number of Hungarians have historically taken out mortgages denominated in Swiss Francs. They liked the low interest rates those mortgages offered. Unfortunately over the last 6 months the Forint (Hungarian currency) has gone down against the Swiss Franc. See the 6 month chart below:
At the time of this writing, the Forint is trading at 204.33 Forints per Swiss Franc. It was higher on Friday. More importantly, it is approximately 10% lower against the Swiss Franc since March. This means that all of those with Swiss Franc denominated mortgages suddenly owe approximately 10% more. They suddenly have to make payments that are approximately 10% higher.
Hungary is worse off fiscally than the US. Can you imagine what it would do to the US real estate market if an appreciable number of home owners suddenly found that they owed 10% more than they had a couple of months ago? How would US citizens react if they had to make 10% higher payments in a high unemployment environment? Do you think Hungary’s real estate market may flounder? Do you think a good number of Hungarians are suddenly poorer? What do you think will happened as this gets worse?
The cumulative probability of default for Hungary is already 23.82%. The 5yr CDS spread is 400bps (up 91.5bps Friday alone). The current debt rating for Hungary is Baa1, but Moody's has a negative outlook on this. If previous market behavior is any indication, this is likely to worsen in the near future.
Do you think the extra Hungarian real estate problems due to the Swiss Franc mortgage problems will help Hungary’s credit ratings? Apparently the failure of a debt auction and a few negative comments by Hungarian officials started the recent credit slide. Can it cascade based on fundamentals such as increasingly troubled Swiss Franc denominated mortgages? A wild guess might be “yes”.
Before the IMF bailout in 2008, many mortgage were denominated in Swiss Francs. In 2006 and 2007 80% - 90% of new mortgages were denominated in Swiss Francs. After the bailout, banks virtually stopped making Hungarian mortgages denominated in Swiss Francs. A chart of the variety of interest rates is below:
If this wasn't bad enough, pre-recession the Hungarian real estate market was being pushed upward by foreign speculators. Many of these were Irish and Spanish. Need I say more?
Good luck trading.
