Increases in bond yields and falling forint have pushed Hungary to ask for a “precautionary” credit from the IMF and Europe.
“Hungary is a warning sign,” Neil Shearing of Capital Economics said. “It is the country where the risks are most acute in the region, so this is where you would expect the trouble to start. We fear this may spread to Ukraine and the Balkans. Eastern Europe has enormous external financing needs for the banking system. They won’t be able to roll over debts if there is a credit freeze in Western Europe,” he continued, adding that Hungary has to collect 18% of GDP in external finance over the next year. Further, there have been some predictions that Hungary will suffer the same foreign investor strike that led to bailouts for Greece, Ireland and Portugal. Should this transcend, it will require some major overhaul of hedge fund strategies.
Eastern Europe is dependent on Eurozone lenders for nearly 80% of its banking system. The region, therefore, faces the risk of a credit crunch as foreign funds slash loan books.
