Reality takes over: first reaction to Britain's exit vote from Hungary's perspective

HUNGARY - In Brief 24 Jun 2016 by Istvan Racz

---

So it finally happened: the UK voted itself out of the EU yesterday. The consequences are pretty much incalculable at this point, but a summary of the key factors from Hungary's perspective may be still useful. Here is list, as a kind of a first reaction:1. Uncertainty. The biggest problem. Nobody knows, what Brexit exactly means, and it will not be known for at least another 2 years, until the end of the upcoming Brexit talks (not even mentioning long-term effects). In itself, this should mean higher risk on EU, including Hungarian, assets, i.e. a weaker forint and/or higher HUF interest rates. For the time being, the MNB had better not touch its interest rates again as a minimum. Further credit upgrades for Hungary are now much less likely than before the Brexit vote.2. Irrationality. In an optimal case, the solution would be a deal in which the UK (assuming it will remain one country) would become a contracted partner of the EU like Norway or Switzerland. The key point would be to allow as little disintegration as possible. But in reality, Brexit talks carry the potential of turning markedly sub-optimal. These will be talks about the basic status quo between 28 independent participants with widely diverse interests at many points, against the backdrop of domestic politics in all member countries, which is full of populistic elements. As a result, the eventual disintegration between the UK and EU may prove to be significant.3. Growth. Uncertainty and irrationality may lead to significant losses in European growth. Given Hungary is heavily dependent on demand from Europe, Brexit will likely hit its GDP growth (though it is currently unclear by how much). However, this...