DBig issues also affect small markets: the new crown, inflation, and interest rate development are not only the exchange rate of the euro against the dollar, but also participants in the capital markets of Central and South-Eastern Europe, which belong to the European Union but not the European Union Eurozone: Poland, Czech Republic, Hungary And Romania. This week, people’s interest in the Hungarian Central Bank was particularly strong. On Tuesday, since the annual inflation rate had risen to 5.3%, for some people, it raised the key interest rate by an alarming rate: 0.30 percentage points to 1.20%. The Czech Central Bank has also announced further measures in this direction, and Poland and Romania still have reservations.
However, general political considerations are increasingly permeating macroeconomic views of business expectations, production, and labor market data to assess the valuation of bonds, stocks, and currencies. The disputes between the European Commission and Poland and Hungary regarding the long-term deterioration of the rule of law and the independence of the courts have led to a high level of vigilance.
As early as mid-June, when there was no “two-pole” debate, Fitch Ratings had already dealt with concerns about the damage, independent control, and lack of effective sanctions systems for EU countries’ credit rating agencies. Her conclusion is: Poland and Hungary are the most worrying. Due to the poor governance standards of Bulgaria and Romania, their existence is relatively small.
Questions about the rule of law
Fitch pointed out that CEIBS has not “changed” its rating due to legal issues in “recent years”. The end of this sentence clearly states: The rule of law and governance considerations often have a negative impact on Hungary and Poland, but have a positive impact on the Czech Republic.
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The EU is also outraged by illegal subsidies to the Agrovert group, which is owned by Czech Prime Minister Andrej Babiš. But this debate has never reached the level of controversy between Warsaw and Budapest. The European Commission believes that the rule of law in Poland and Hungary is in danger. In Poland, the issue is judicial reform and whether the country recognizes the European Court of Justice jurisprudence. In Hungary, it is about a law designed to protect children from sexual indoctrination, but in its context, there are also many individual attempts by Prime Minister Viktor Orbán and corruption allegations at the highest level. The EU has set a deadline and threatened fines, which may withhold payments from the Reconstruction Fund (NGEU).
Hungarian investors are more sensitive
Seriously, no one expected this. Therefore, this is not reflected in the price of Polish Eurobonds, DZ Bank analyst Daniel Lenz wrote, and warned: “However, since market prices do not reflect any further escalation, if Warsaw does not make concessions, the reaction may be obvious. And suddenly Brussels will also stop payments to NGEU. “In the short term, he is more willing to hold “low-risk bonds” to maintain safety, and recommends “cautious and reduce holdings of Polish European bonds.”
What about Hungary? “Hungary may have a greater impact on the market than Poland”, FAZ’s Lenz said, Hungary’s credit rating (average: BBB) is worse than Poland; European bonds themselves have a higher risk premium. “Because Hungary is also more heavily indebted than Poland, investors may be more sensitive to any delay in payment of funds.” This did not prevent Orban from imposing conditions on the EU to accept new crown aid funds a year before the election.
No long-term effects yet
Deutsche Commerzbank analyst Tatha Ghose pointed out that financial sanctions still have a long way to go, and “it is not so easy to implement.” Gunter Deuber, head of national economic analysis at Raiffeisenbank International, believes that huge pressure from the European Union requires the tightening of thumbscrews “even if it is verbal in the first place.” He remains calm about the possible impact of financial sanctions. The short-term impact on the bond and foreign exchange markets is relatively small. The central bank can provide local support by raising interest rates. On the other hand, regional stock markets may “react more coldly, because without EU funds, long-term growth potential may be lower.”
In the medium to long term, if the grants are no longer available and have to be replaced by loans, the rating may be under pressure. “However, to have real market influence, it will take years to completely block EU funds,” Deber said.
He believes that Poland “can be prepared to compromise quickly if there are doubts.” Last but not least, the EU can pay the government money to individual groups such as farmers, medium-sized companies, and civil society-thereby increasing the pressure on the government.
