The move comes in the wake of a tumbling Forint after the EU rejected Hungarian PM Ferenc Gyurcsany’s request for a $230 Billion aid package to distressed Eastern European countries and further fear that the country’s recession would deepen.
Hungary’s monetary move to bolster its currency follows our thesis – “When You Can’t Cut”, implying that the need of many nations in this region to strengthen their devalued currencies trumps the benefits associated with cutting interest rates.
The strengthening of the Forint is only a near-term solution for a country in its worst recession in 16 years. Hungary was the first country in the EU to take international assistance to avoid default last year, which on the margin is positive. The $35 Billion loan from the IMF has helped to shore up its banking system before the rest of the manic news about Eastern Europe hit the presses. We’re not close to deeming Hungary’s economy or growth potential as healthy, yet are actively differentiating its prospects with those of its neighbors.