Crisis mounts in East Europe after shock 3pc rate rise by Hungary
source: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3243058/Crisis-mounts-in-Ea...
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Hungary has raised interest rates by three percentage points to 11.5pc in a drastic move to stop the collapse of its currency peg against the euro, raising fears of a crunch across Eastern Europe as a string of states are forced to follow suit to stem capital flight.
The fast-moving crisis echoes the final days of the Exchange Rate Mechanism in 1992, when Britain, Italy, and Sweden raised rates to extreme levels to defend their currencies despite economic recession, with little success.
Hungary's premier Ferenc Gyurcsany said the county was left with no choice as the forint went into a free-fall. It has dropped 16pc against the euro since the start of the month and is now at the bottom of its ERM band. "There is still an exceptionally large speculative pressure on the forint. We will take every measure necessary," he said.
It is unclear whether the move will prove enough to prevent a forced devaluation. The treasury had to cancel a bond auction yesterday as buyers stayed away.
"We doubt the effect will be long-lasting," said Lars Christensen, East Europe strategist at Danske Bank. "The markets are very likely to test how far the central bank is willing to go."
Simon Derrick, from Bank of New York Mellon, said the rate rise was probably doomed to failure. "As soon as you see aggressive actions like this when the economy is not strong to take it, you know it is unsustainable," he said.
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The fast-moving crisis echoes the final days of the Exchange Rate Mechanism in 1992, when Britain, Italy, and Sweden raised rates to extreme levels to defend their currencies despite economic recession, with little success.
Hungary's premier Ferenc Gyurcsany said the county was left with no choice as the forint went into a free-fall. It has dropped 16pc against the euro since the start of the month and is now at the bottom of its ERM band. "There is still an exceptionally large speculative pressure on the forint. We will take every measure necessary," he said.
It is unclear whether the move will prove enough to prevent a forced devaluation. The treasury had to cancel a bond auction yesterday as buyers stayed away.
"We doubt the effect will be long-lasting," said Lars Christensen, East Europe strategist at Danske Bank. "The markets are very likely to test how far the central bank is willing to go."
Simon Derrick, from Bank of New York Mellon, said the rate rise was probably doomed to failure. "As soon as you see aggressive actions like this when the economy is not strong to take it, you know it is unsustainable," he said.
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