Although Mihály Varga has just announced the possible introduction of the euro in Hungary, in reality, the country’ s economy is not prepared for it. The CEO of GKI Economic Research Co believes Mihály Varga’s announcement only serves the purpose of confusing less sophisticated investors.
Hungary insisted on keeping the HUF
According to László Molnár, Hungary is much further from the introduction of the euro than at any time in the last ten years. When Hungary had the greatest chance to enter ERM 2 and consider introducing the euro (between 2013 and 2017), the government insisted on keeping the HUF, writes 24.hu. They said that keeping the HUF is the guarantee of an independent economic policy.
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Hungary is far from introducing the euro
Now that the economic crisis has reached Hungary, this is also not the right time to introduce the euro. In addition, if a member state is ready to introduce the common European currency, it first has to meet various convergence criteria. Among other criteria are the public budget deficit, inflation and the public debt in proportion to GDP. – reports Pénzcentrum. However, Hungary is having difficulties in these areas.
László Molnár lists the following problems:
- the national debt nominally doubled compared to 2010 reaching a record level
- unprecedented deficits appeared in the budget
- Hungarian inflation data are among the worst in the EU
- interest rate is also far above the EU average interest rate
Trick: announcing the introduction of the euro can have a strengthening effect on the HUF
The CEO of GKI Economic Research Co believes that Hungary’s external financing is in such a bad situation that announcing a possible introduction of the euro can have a strengthening effect on the HUF. It can be beneficial if the investors get confused by the fact that the government is considering the introduction of the euro. In fact, Mihály Varga, Minister of Finance might be able to deceive those less sophisticated investors who have less than 1 percent of Hungary in their portfolios and who are considering whether to buy HUF-denominated government bonds. Personally, the minister would probably not refrain from introducing the euro, but this is far from the official position of both the government and the Hungarian National Bank.
Potential investors must believe that the HUF exchange rate will strengthen
Due to the high deficit of the current account and the foreign trade balance, extra funds are urgently needed. However, since the state does not want to issue foreign currency bonds, the only solution left is to attract investors to the HUF government bond market. Although the interest rate on HUF government bonds is above 10 percent, the volatility of the HUF is 18 percent within a year, which will take away the interest rate. Therefore, potential investors must believe that the HUF exchange rate will strengthen.
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Source: 24.hu, Pénczentrum
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