Hungary - Here we go again

Recent statements by the spokesman for Hungary’s new Prime Minister Viktor Orban, alluded to the country being in a “grave situation” because the previous government “manipulated” numbers and “lied” about the state of the economy.Peter Szijjarto stated that, "It's clear that the economy is in a very grave situation...I don't think it's an exaggeration at all" to talk about a default. Orban took office on May 29th. Nice start to the job. The former finance minister said that the country is "in no way near default."

The market did not wait to determine whether these comments were true or false. It was major sell on HUF. Credit lines and FX swaps are tighter.

The economic data is mixed. Growth has turned positive but is not very exciting at .1% for the first quarter. Business confidence and economic sentiment are still negative although better than earlier in the year.

The current account shows a surplus and the external financing capacity is positive. Hungary needed a 20 billion euro loan form the IMF in October 2008.

The ratings agency Moody's offered the comment that Hungary is not "the next Greece". Of course, the rating agencies have had a history of being behind the curve.

Iran and the Euro

Iran reported that it will be selling $5 billion euros and buying dollar and gold for central bank reserves. This is the same country that wanted to price oil in euros and has little respect for the US. I guess money talk is always more important.

It was noted that Russia has also be a seller of euros for its international reserve portfolio. China affirmed that it is still positive on the Euro, but it is easy to see that diversifying now given their trading pattern makes sense.

I am still amazed at how quickly sentiment has changed and moved away from the euro. Nothing is a given especially if there are structural problems with currency. The policy coordination and governance problems have yet to be addressed in the EU.

Bank fo Canada raises rates

The Canadian overnight loan rate was raised to 50 bps from 25 bps. This was expected given that Canadian economic growth is coming in faster than the US. Inflation has been modest and there is a potential problem with rising real estate prices. Most comments suggest that central bank governor Mark Carney is taking a cautious approach. The BOC is the first of the G7 to raise rates.

While the Canada dollar has been off its high, it may be the preferred currency for many countries that want to diversify its reserves. It has a stronger fiscal balance sheet than many of the other G20 countries, good governance, and strong natural resources.

Has the natural rate of unemployment gone up?

Important story on Bloomberg that suggests more economists believe that the natural rate of unemployment has risen to 7-7.5% and is not at the 4-5% range. The NAIRU is very important in any discussion about inflation. If the natural rate is higher, the Fed may have to start raising rates sooner not later. The likelihood of inflation will also be higher. This is not relevant for 2010 given the output gap is still negative and unemployment is still hovering around 9.8 percent, but over the longer-run this could be a problem.

The natural rate could be higher for a host of reasons from regulatory costs to misallocation of education versus job demand. What it does mean is that the days of low inflation and below 5% unemployment will be distant memory. The chance for stagflation will be higher and nominal interest rates may find an equilibrium at a higher level. The Fed may have less room to affect growth while keeping prices stable.

This higher natural rate is consistent with the new economic view that the US will have a lower growth trajectory.