Hungary and Other Emerging EU Countries in the Financial Storm by Júlia Király

Author:Júlia Király
Language: eng
Format: epub
ISBN: 9783030495442
Publisher: Springer International Publishing

In February 2009, CEE panic was boosted by a fatal misunderstanding. Some analysts misinterpreted cross-border data published by the Bank for International Settlements (BIS) and broadly exaggerated the exposure of Austria or Italy to the region, forecasting total collapse both for home and host countries. The analysts’ conclusion was unanimous: these contagious countries should be isolated from the West. By the time the misunderstanding had been clarified,2 facts and fiction had been separated, and incorrect data had been improved, investors were fleeing this most vulnerable part of the world. All the currencies of the region weakened, and credit default swap (CDS) spreads broadly increased. Central banks were trapped in the usual crisis dilemma of FX-indebted countries: interest rates should have been reduced because of the deepening recession, but a lower interest rate further weakened the currency and threatened the balance sheets and debt service of FX-indebted households and corporates.

In Hungary we had to halt our rate-cutting cycle. The October Rescue Team was reconvened, and we spent days and nights again in the Central Bank building, with endless workshops, meetings, and brainstorming sessions following one another. Coffee machines were working at full capacity again.

Some of the worrying questions we had in mind were: What if panic strengthened? What if capital outflow accelerated further? What if the forint collapsed? After communicating with other regional central banks, we agreed on joint action.

On 23rd February, free-floating regional central banks published a joint press release, asserting that Central and Eastern Europe was not a crisis region, and no massive capital outflow was expected:With their liquidity and capital situation significantly improved, Western European parent banks remain committed to their subsidiaries in the region. In addition to verbal commitments, this can be seen in the continued cross-border flows from the parent banks to their CEE subsidiaries…. While some exchange rate adjustment is indeed appropriate in these economies, excessive depreciation which is not justified by economic fundamentals can be disruptive and should be avoided. (MNB 2009a)

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