PM Will Ride Out Of This Storm Too

Regarding short-term market impacts, this would be the best possible scenario, although the economists polled do not expect massive market moves even in case of early elections. What came out nicely from the survey is that the analysts do not have a hard time imagining a better scenario.

As it had turned out earlier, the market would go for early elections as the best long-term solution, so we have chosen not to formulate a normative question in respect of the resurfaced political tensions.

Instead we aimed to find out which one of the possible political scenarios the analysts find the most likely to materialise. The majority believe PM Gyurcsány will not be unseated - at least this has a 51% probability, according to the consensus. The likeliness of the other scenarios is smaller, but a common point in these was the replacement of the PM - their overall probability is 49%.

Gyurcsány's “survival" would spark positive short-term market reactions: bond yields would slightly drop and the forint could strengthen. It is clear, however, that the analysts do not necessarily prefer this version for the longer run. “If Gyurcsány stays, this lukewarm stability will remain, as well. If he leaves, at least something will change," one of the respondents summed up the views of many others. This remark, however, also holds the view that the current PM continues to represent a guarantee for the market that fiscal discipline will be kept up.

The respondents were not as unified in their views about the other possible scenarios.

An MSZP-SZDSZ caretaker “expert" government (the second most likely scenario) spawned more “diverging" projections in respect of the possible market reactions. An almost equal number of projections for positive and negative implications gave us the overall view that no major changes should be expected on the bond and stock markets, while the forint may depreciate moderately. As a general conclusion we can say that the murkier the market reactions to a possible scenario are, the more likely that the analysts forecast unfavourable short-term market trends.



Thus it is no surprise that short-term market reactions would be the ugliest in case of early elections. At the same time, the analysts were split about the length of “short term". Some said a correction would take place after several months, but others believe the market would digest the situation by the end of the first trading day and positive processes (a fall in yields, share price increases) would kick off already the next day.

“There are too many risk factors to judge the outcome but hard to see any result with short-term positive impact," said Gábor Ambrus , analyst at 4Cast in London.

“Some sort of deal between the Socialists and Liberals seems likely. Neither party want early elections, as the Liberals would be wiped out and the Socialists would suffer a crushing defeat," said Nigel Rendell , analyst at the Royal Bank of Canada in London.

“The main risk is that Gyurcsány loses patience, decides to quit as PM and goes back to his business interests. He has been the architect of the fiscal improvements over recent years. The financial markers still view him as a strong stabilising force and his departure would be bad news for the HUF, bond and equity markets," Rendell added. He believes that at this stage some sort of compromise between the Liberals and the Socialists seems likely.

Altogether we can expect muted market impacts, mainly because political tensions are not new and these have already been partly or fully priced in by the markets, e.g. after the break-up of the governing coalition, commented Péter Duronelly and Dániel Bebesy , economists at Budapest Fund Management . They underlined that Gyurcsány's ousting have already come up several times and the market reaction to the news was weaker every time.

At the same time, we sense a slight turnaround in the results, compared to our previous poll, namely that a certain degree of pessimism is palpable in case of every possible scenario. This indicates that the mood has turned bitterer on the market.

"The tax proposals are flaccid. They fail to improve the outlook on growth, but at least they would not boost inflation and apart from a minor hit to the (budget) balance they would not cause any major harm. This is largely what the market expected, and so, in our view, bonds could start to firm again after a short period of market turbulence. Owing to a continued rise in foreign exchange debt, the forint would keep on firming, while this scenario is not to exert any impact whatsoever on stocks, as the BSE is moved by global markets rather than by local stories," the economists at Budapest Fund Management projected for a scenario where Ferenc Gyurcsány remains PM.

After some initial hesitation, the market has decided to regard the "great return" of the SZDSZ as a positive development. But they could not hide their concerns, either. “Even an SZDSZ tax package would not turn the current system upside down. As the party probably has no viable tax proposals in its bag, as it did not have in the past ten years, we don't mind at all that they don't want to try and save the world with a sudden brainstorming action," Bebesy opined.

While a number of economists see a breakout opportunity in a caretaker government of “experts", they have their concerns about this scenario, as well. A caretaker government is a two-in-one scenario, since there is no guarantee that even such a cabinet would be able to present a viable and conceptual programme. 

It may have one and it may not. In the latter case this caretaker government would be nothing more than a platform for behind-closed-doors bickering and horse trading. Under this scenario, it is not hard to predict how the FI and FX would react, but the stock exchange would be certainly more interested in what is happening “out there" then on the local political stage."

Source: Portfolio Online Financial Journal