Despite receiving news about a final approval of the Greek rescue package both regional forex and fixed-income markets were remarkably stable yesterday.
Nevertheless the attention of CE and particularly Hungarian markets returns back to Brussels, while the topic is not Greece or any other country among PIIGS this time. According to EU sources the European Commission will recommend at its Wednesday meeting to have cohesion fund commitments to Hungary suspended as of 1 January 2013. Although the EC’s recommendation should not contain specific figures as to how large or what percentage of EU funds should be frozen by Brussels, it is true that the Cohesion Fund regulation allows a partial or total suspension of regional money already committed for the upcoming year.
In our view the EC warnings about suspending of the cohesion funds to Hungary should work as a tool to press Hungary for maintaining tight fiscal policies in the years 2012-2013. We think suspension will remain a threat and albeit not zero probability, our base case scenario is that the government will do what is needed to avoid such a scenario because currently inflows from cohesion funds give the backbone on investments in Hungary. Suspending that would hurt the growth outlook much and hence it would not be good for either side.