Hungary, Vietnam Downgraded, Greece Restructuring Rumored

Christmas Eve saw heavy action on sovereign debt,  but the markets was more inclined to attribute the changes to bookkeeping on the part of the ratings agencies. The problems of the two nations are well-known, stretching back to 2008 in the case of Vietnam, and to the March-May period in the case of Hungary, if we don`t consider the earlier troubles during the post-Lehman implosion of global markets. Euro was almost unchanged, and in general market volumes are reported to be extremely thin, with very limited activity taking place beyond automated trading, hedge adjustment,  and other routine activities.

Fitch Downgrades Hungary

Hungarian officials are protesting, but Fitch is unwilling to go with the other rating agencies in acting with unlimited leniency to the troubled European nations and has  downgraded Hungary to one grade above speculative grade, just before the February announcement of he government`s structural reform plans. We expect that other agencies will follow suit and cut the rating of Hungary in the coming few weeks.

So far markets are not reacting very strongly, no doubt because most traders are on vacation. Still, since most factors are already pointing to a downward course for the Euro, this particular piece of news is neither surprising nor unexpected. The Hungarians do not seem to be extremely alarmed anyway, since they still have the option of devaluing themselves out of their difficulties (Hungary is not a Eurozone member), and with the union in grave difficulties, if their entry to the Euro is delayed a little, what loss they will suffer in consequence is not that clear. More  significant is the possibility that the deterioration in the region will lead to a contagion in the European East, and as most nations there are already walking on crutches, the possibilities are not very appetizing for lovers of risk. It is clear that the first half of 2011 will be heavy on downgrade, deficit, and restructuring news.

Vietnam Downgraded

The PBOC, on the 24th, set the parity rate at 6.6466 vs. 6.6548 essentially keeping the yuan stable at where it had been for the past few weeks. Not much is happening in the Far East, but the Chinese have been continuing their comments that they will keep investing in the Eurozone as a key investment region, with little effect on the EURUSD so far.

Meanwhile, in an expected but painful move for Vietnam, the ratings agency S&P has cut the sovereign rating of the country by one notch to BB- and maintained the negative outlook. The country is battling with rapidly dwindling forex reserves, high inflation, as well as eroding confidence in the government`s ability to manage the economy, which justifies the recent moves. Indeed, the CDS market has been maintaining a negative tone on the country since the end of 2009.

Greece Will Restructure its Debt, Market Rumors Suggest

Five-year CDS of Greece has widened by almost 40 bp, after news published by the Ta Nea newspaper in Greece that the government is consulting with the E.U. about its plans to force a restructuring of debt due after 2013. This would be against the spirit of the recent bailouts where creditors have mostly been protected from absorbing any of the costs. At some point, something of this sort is of course inevitable, since neither the E.U. nor the Greeks can afford to dispose of all of the huge debt burden without some contribution from creditors. Yet, we don`t think this point will be finalized while the present governments are in power, as they can still keep delaying problems for as long as they can.

Apart from these, we note the scheduled visit of Hu Jintao due January 19th, which is of great importance in light of the crucial role of the U.S.-China relationship in determining the future of the world economy. Yuan issue, trade disputes, the problems in Korea are likely to be main themes of discussion, and what the leaders say will have decisive impact on market analysis and positioning, at least as far as we are concerned.