While most western central bankers are slowly, if grudgingly, admitting that everything they have done since the start of the “most hated rally in history” has been to create precisely this rally (also explaining why it remains so deeply “hated” as none of it is in any remote way natural) at least in Hungary they are dead honest from the onset, that when it comes to propping up the economy it all starts (and ends) with the stock market.
According to Reuters, the Budapest stock exchange, now majority-owned by the central bank – just a few conflict of interest there – approved a new strategy on Wednesday to boost new listings and attract new investors, helping the government’s efforts to buoy the economy.
The National Bank of Hungary, run by Prime Minister Viktor Orban’s close ally Gyorgy Matolcsy, bought a majority stake in the stock exchange in November, in a move seen as another state attempt to help prop up the economy. Actually, what the move does is provide the implicit guarantee of the central bank to risk assets, something that has been explicitly or implicitly the norm across most other countries for the past 7 years.
The symbiosis between the central bank and the government – as is the norm around the globe – is not new: Matolcsy has helped Orban’s economic policies with interest rate cuts and a massive funding for lending programme in the past three years.
As Reuters adds, the Budapest Stock Exchange’s new strategy for 2016 through 2020 aims to end a dearth of listings and reverse a fall in turnover seen over the past years, just as the central bank starts to trim back its massive cheap loans programme.
In turn, the central bank has now turned its attention to stocks: Hungary’s stock market index surged almost 44 percent last year, and is currently trading at six-year highs, but its capitalisation is lower than regional peers, new listings are scarce and volumes remain below pre-crisis levels.
This is how the central bank-controlled exchange plans to do it: “Right now the most pressing task is to help successful listings by having companies go public that meet the high quality standards required to strengthen investor confidence,” the bourse said in a statement. “It is also important that listings take place at pricing levels that provide room for future price increases.”
Basically Hungary is taking a piece of US monetary policy, where it will pump up the entire market, and also from China, where it hopes to force investors into “sure thing” IPOs, generating an overnight “wealth effect” for those who are allocated shares, if not for the bagholders who end up buying said shares in the open market.
Among the central bank’s other intentions, is that it wants to boost the number of large liquid shares to at least five from a current three to four, and use European Union funds to develop the capital market in close cooperation with the government, it said. It said new issuance could come primarily from state-owned companies, and the government would examine the possibility of listing some companies. It did not name specific companies.
But most importantly, the bourse will aim for five share or corporate bond listings per year and boost stock market capitalisation to about 30 percent of gross domestic product from less than 20 percent today.
In other words, the central banks hopes to boost the economy, by artificially pumping up the market.
Reuters concludes by saying that Hungary, whose debt has been rated “junk” since 2011 due to Orban’s unpredictable policies and the country’s high debt, is expected to regain investment grade status this year thanks to its improved fundamentals.
By which it means, of course, another stock market bubble.
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