One country very sensitive to economic events in Switzerland, specifically the strength of the CHF, is Hungary. Hungary has a high ratio of loans denominated in a foreign currency – over 60% of GDP – most of which is in Swiss francs. As the HUF weakens, especially if against the CHF, Hungary’s external debt position rapidly worsens. Indeed, the correlation between Hungarian CDS and CHFHUF is as high as it’s been in 2 years.
If the Swiss were to suddenly lose control of the peg – and nothing could be taken for granted if there was an abrupt event in Europe – Hungary’s external position would rapidly and significantly deteriorate. CDSs would move considerably higher than their current level of about 600bps.
Hungary was one of the first countries in the current credit bubble and its subsequent bursting to be in some sort of IMF rescue program, receiving its first loan from the organization in November 2008. Austerity in some form or another has been in play in the country since as early as 2006 as the government sought to reduce the budget deficit to comply with EU requirements. It is no surprise Hungary has struggled to generate any long-lasting growth for over the past 5 years.
If investors want to see the picture for the periphery going forward, we point to Hungary as a leading indicator for countries hindered by their currencies and their external debt positions.