Below is an excerpt from our weekly report from last Wednesday. On Friday, Moody’s downgraded Ukraine to Caa1 (from B3), citing plummeting FX reserves, downside risk from future negotiations with the IMF, and Ukraine’s worsening relations with Russia. Less reported…
While a good deal of investor attention has been focused on the US of late, in the process relegating the EU debt crisis into clear second place, CEE economies have been largely subjected to benign neglect. Arguably this is a mistake, since a lot can be learnt from following the evolution of these economies, many of which are undergoing a rapid transition from being emerging prospects to over-mature stars of yesteryear. The unique demographics which are to be found in the region make them a fascinating laboratory for what might happen in other parts of the world, most notably China, as we move into the 2020s.
The situation in Ukraine is once more coming to a head, as it did so in 2008 and 2009. To avoid a hard default, a critical outflow of foreign funds, and a complete depletion in the central bank’s reserve assets, Ukraine should drop the peg (or widen the trading band) to the USD and devalue its currency.
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.