More Trouble In Eastern Europe

Hungary in ‘Grave’ State, Official Says; Forint Falls (Update2)

Exerpts from Bloomberg Business Week
Read whole article here:

By Edith Balazs and Zoltan Simon
June 4 (Bloomberg) -- Hungary’s economy is in a “very grave situation,” a government official said, adding to concern about Europe’s sovereign debt crisis, hurting U.S. stock futures and sending to forint to a 12-month low.

“It’s clear that the economy is in a very grave situation,” Peter Szijjarto, spokesman for Prime Minister Viktor Orban, said today in Budapest. “I don’t think it’s an exaggeration at all to talk about a default.”

Former Finance Minister Peter Oszko said Hungary is “in no way near default.” Public debt equaled 78 percent of gross domestic product last year, compared with an average of 74 percent for the European Union.

The new government’s communication is “part of short-term political tactics,” and loosening fiscal policy after elections “would escalate panic” among investors, Oszko said in an interview today. Orban, who took office May 29 after winning elections with pledges to cut taxes and stimulate the economy, yesterday failed to get European Union approval to widen the budget deficit.

“I’m staggered by these comments,” said Tim Ash, global head of emerging-market research and strategy at Royal Bank of Scotland Group Plc, referring to Szijjarto’s statements. “It’s ridiculous, remarkable and extremely dangerous. What message does this send to foreign bondholders? You will look to protect your investments.

Forint Falls

The forint fell 2.1 percent to 287.58 per euro as of 2:03 p.m. in Budapest. The currency dropped 2.5 percent yesterday after Lajos Kosa, a deputy chairman of Orban’s Fidesz party, said Hungary had a “very slim” chance to avoid a Greece-like situation. The benchmark BUX stock index fell 3.5 percent, and credit-default swaps on Hungarian government debt rose 69 basis points to 391.5, according to CMA DataVision.


The Sovereign debt problem is unfolding as we expected. When a new governing party take the reigns of power, greater fiscal problems are revealed.

Notice that Hungary is very close to the 80% Debt to GDP ratio that we consider the point of no return.

When the officials speak of default, they are not exaggerating, at some point, and Hungary appears to have reached this point, default is more or less inevitable.

And Sovereign default is part of the deflationary cycle.