| Remember 1990. All the central European states were emerging from Communism with their economies in tatters. The Polish government negotiated with its creditors a debt reduction agreement which halved its outstanding foreign debt. The Hungarians, on the other hand, despite an even more onerous debt burden, refused to do so. "We are honest people who repay our debts," the government argued. Over time, the Hungarians reasoned, investors would remember this stance and reward the country by demanding a smaller risk premium for buying its bonds. Six years on, this has not happened. Poland finds it no harder to borrow than Hungary. The most recent Polish Eurodollar bond issue for state-owned (but soon to be privatized) Bank Handlowy came at 88 basis points over US treasuries. The only Hungarian issue this year so far was a Deutschmark floater at 90 basis points over Libor. It is hard to compare the two, but the Hungarian issue was certainly no cheaper, and probably rather more expensive, than the one for the Polish bank. That is unsurprising given the respective credit ratings of the countries. Moody's, for example, rates Poland (Baa3) a notch above Hungary (Ba1) although Standard & Poor's has them the other way round. |