Financial Associated Press, August 1 (Editor Xiaoxiang) Under the threat of an unprecedented energy crisis in Europe, the depreciation momentum of the euro this year has undoubtedly impressed many investors - the euro fell below 1:1 against the dollar in the middle of last month. the parity mark for the first time in nearly 20 years.
The depreciation storm faced by the euro this year has even deepened the doubts of many euro zone members about the operating mechanism and design framework of the single currency. However, if you really thought that many euro area countries would be better off without the euro, you might be wrong.
In fact, the current situation of many European currencies is even more unbearable than the euro, and even the euro, which has plummeted this year, is a "treasure" in the eyes of the people of these countries...
Hungary, which has not yet joined the euro zone, is undoubtedly the best example of the current situation of its currency forint!
In Hungary: the euro is highly sought after?
What is the weakest European currency so far this year? If we leave the Ukrainian currency hryvnia aside, the answer may be the Hungarian forint.
So far this year, the Hungarian forint has fallen 8% against the euro and nearly 18% against the dollar. The worst performing currency in Central Europe so far this year, the forint hit a record low of 416.90 against the euro earlier last month.
This has also led to a phenomenon that makes many people feel ridiculous - the euro, which is now being complained about by Europeans due to the devaluation of its currency, has become a "ballast stone" in the eyes of the government, companies and even the public in Hungary.
(Euro vs Hungarian Forint) Like other EU member states such as Poland, the Czech Republic or Romania, Hungary is still a long way from adopting the euro as a currency of circulation despite being a member of the European Union. Prime Minister Viktor Orban The current government has largely ruled out the use of the euro as legal tender for the foreseeable future, arguing that such a move would result in a loss of economic policy sovereignty.
However, due to Hungary's double deficit and the stalemate with Brussels over issues such as blocking the inflow of EU funds, the Hungarian forint has continued to depreciate sharply during the year, which has made many Hungarian people and companies more willing to accept the euro as a transaction and storage currency.
Shortly after the Russian-Ukrainian conflict erupted in late February, Laszlo Szucs, a lawyer at the law firm Reti, Varszegi & Partners, began receiving calls from more corporate clients asking how they could compensate employees for the losses they faced as the forint fell in value. He said most of the calls were from financial and business services companies and manufacturing companies.
Since paying wages directly in euros is against Hungarian law, with few exceptions, most companies opt for special raises worth 5-10%, while others offer quarter-end related forint changes, Szucs said. Additional salary compensation.
Furthermore, he points out that the Hungarian IT services industry has shifted almost entirely to new project contracts based on the euro in the past three to four months. In the IT services industry, many companies are independent contractors and pay bills in euros with foreign clients.
Available data show that, so far, companies have effectively pegged prices to the euro in some industries, although the shift of domestic payments to the euro has remained limited. The latest government figures show that the euro's share of non-financial corporate deposits has reached 35.1%, compared with 34.7% in January. However, the Hungarian government insisted that there is no sign that the trend towards euroization has increased.
Difficult situation for the Hungarian central bank: currency crisis on top of energy crisis
While workers and consumers in other European countries are also facing pressure from runaway energy and food prices, the forint's devaluation is clearly particularly bad today.
In order to curb the depreciation of the forint and stabilize prices, the Hungarian Central Bank announced a 100 basis point interest rate hike last Wednesday (July 27), raising the benchmark interest rate from 9.75% to 10.75%. This is the first time the country's benchmark interest rate has risen above 10% since December 2008, and the 15th rate hike by the Hungarian central bank since June 2021.
Hungary's central bank monetary committee said in a statement that the crisis in Ukraine, the rebound of the new crown pneumonia epidemic, high commodity prices and continued supply chain disruptions have increased the risk of a global recession, and Hungary will face long-term external inflationary pressures. The central bank will continue to respond "quickly and flexibly" by adjusting interest rates if near-term risks rise in financial and commodity markets.
Hungary's official data showed that the country's inflation rate reached 11.7% in June this year, far higher than the 3% target set by the Hungarian central bank. Hungary's central bank had previously predicted that the country's average inflation rate this year is likely to reach 11% -12.6%.
Pay taxes in EUR or USD
It is worth mentioning that the Hungarian government unexpectedly announced on Saturday that in addition to forint, the government will allow companies to pay taxes in euros or dollars.
Hungarian Finance Minister Mihai Volgao announced the news on social media. He said the option would be available to all companies and the new rules would simplify the process while ensuring that tax revenue continues to flow into the country and budgets remain balanced.
Analysts believe the move will boost Hungary's foreign exchange reserves, but it could also further weaken the importance of the country's currency, the forint. The Hungarian move is similar to a plan announced last month by the Czech government to allow companies to pay taxes in euros from 2024, enabling the country to borrow in euros.
David Nemeth, senior analyst at K&H Bank, said, “Companies can save on foreign exchange fees ... The government may aim to increase foreign exchange reserves. Even if a deal is reached with Brussels this autumn, there will be no significant EU funds by the end of this year. Issuing foreign currency bonds is an easy way to get foreign currency.”
Governments can also refinance foreign currency-denominated bonds with taxes paid in euros or dollars, Nemeth said. If more and more market participants are able to use only the euro, the forint will be less important. The move also means moving closer to the euro zone without adopting the euro.