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Hungary raises specter of Greece


Hungary's markets tumbled on Friday on confusing comments from the new government on the state of public finances, prompting the central bank to rush to reassure investors the country's budget was sustainable.

Markets were spooked by comments from the prime minister's spokesman that he supported the view his country had only a slim chance of avoiding a Greek-style debt crisis, although he said his government would act swiftly to avoid the Greek path.

The forint plunged over 2 percent versus the euro to a new one-year low at one point, while five-year credit default swaps (CDS) jumped, as investors were shocked by the government's comments and urged clarity on its plans.

The euro slumped against dollar on fears that Hungary could become next casualty in the European debt crisis.

The new Hungarian government, which was sworn in less than a week ago, said it would soon announce an action plan to tackle economic problems, after it publishes the figures about the "true" state of the 2010 budget this coming weekend or early next week.

The central bank said external and internal balances had improved and although the deficit this year was expected at 4.5 percent of GDP, above the target of 3.8 percent, it was sustainable and Hungary had a current account surplus.

"The country's current account shows a surplus and the external financing capacity is expected to remain positive in the coming two years," the bank said in a statement.

"Although the fiscal developments show some slippage compared to the budget law, fiscal tensions stemming from the accumulated debt of state-owned enterprises do not endanger the sustainability of government finances," the bank added.

The center-right government won elections in April by a landslide, winning a two-thirds majority of seats and ousting the Socialists. It has said it wanted to boost growth via tax cuts and economic stimulus measures.

On Thursday, the ruling Fidesz party's vice chairman Lajos Kosa was cited as saying by news website napi.hu that it had found public finances in a much worse shape than previously expected and there was only a slim chance of avoiding a Greek-style scenario.

When asked about those comments, Prime Minister Viktor Orban's spokesman Peter Szijjarto told a news conference:

"It was (former Socialist) Prime Minister Ferenc Gyurcsany who spoke about a default. Moreover, he proudly said that Hungary was close to default, he said that a year and a half ago ... and then he was proud that he could only save Hungary from default by taking the IMF loan."

"From this aspect I do not think (Kosa's comments) are exaggerated at all."

Szijjarto also told the news conference that the previous government falsified economic data.

"In Hungary the previous government falsified data. In Greece, they also falsified data. In Greece the moment of truth has arrived. Hungary is still before that," Szijjarto said.

"This is exactly what we want to avoid, and this government is ready to avoid the path that Greece took. After realizing what reality is, we will not hesitate to act," he said.

Socialist party parliamentary group leader Attila Mesterhazy said Hungary was not close to default.

Szijjarto said the austerity measures and tax hikes which the Socialist administration tried in the past had failed.

He said tax cuts would not be delayed even in the face of a higher budget deficit. It was not clear how that could square with bringing the deficit under control.

The previous government regained markets' trust by containing the deficit at 4 percent of GDP last year with deep spending cuts, after Hungary resorted to IMF and EU financing in October 2008 to avert meltdown.

The country has been financing itself from markets again this year and has not drawn on any IMF funds so far in 2010.

DEFAULT FEAR

Financial markets tumbled after the government's comments.

The forint plunged over 2 percent versus the euro to a new one-year low of 289.80 before recovering slightly. Five-year credit default swaps (CDS) surged 100 basis points to 430 basis points, while bond yields jumped 40-70 basis points.

The stock of OTP Bank, the country's biggest lender, closed down 11.1 percent.

"The comments made over the past 24 hours are highly concerning as they not only increase fears in the markets over a possible Hungarian default, but also clearly demonstrate that the Hungarian government has very little understanding of how the financial markets actually work," Danske Bank said.

"For now, we advise our clients to show utmost caution on the Hungarian markets as there is a clear risk that this could escalate further," the bank said.

NO CLARITY

The new government has repeatedly warned in the past few weeks that the 2010 deficit could be much higher than the target of 3.8 percent of GDP agreed with the EU and IMF, blaming "fiscal skeletons" left by the previous administration.

Earlier on Friday, Orban said the government's action plan would include measures to improve finances, but gave no details.

"It cannot be about ... an adjustment, about patching up (the economy) ... measures aimed at improving the financial situation must be linked with deep structural changes," Orban told TV2 television over the phone from Brussels.

The European Commission on Thursday urged Hungary to cut its budget deficit faster.

The central bank has said the deficit could be 4.5 percent of GDP or 4.3 percent if the government freezes remaining budget reserves. Analysts see a deficit of 5 percent.

"The government is now playing a very dangerous game with investor confidence," Timothy Ash of Royal Bank of Scotland said.

"There might be a temptation to talk of the risks of default to manage expectations domestically toward the need for a continued tight reign on fiscal policy and the maintenance of fiscal austerity, but this does not go down well with investors."

(Reporting by Krisztina Than; editing by Patrick Graham/Mike Peacock/Susan Fenton)

http://news.yahoo.com/s/nm/20100604/wl_nm/us_hungary_budget_2



The Buzz: Hungary: Europe's (and Wall Street's) latest fear


Just when we all got used to referring to Europe's fiscal crisis with the tidy little acronym of the PIIGS, another European country is angling for admittance into the bad debt club.

Stocks tumbled Friday morning, and while a big reason for that was the disappointing jobs report, futures were already lower before the jobs numbers came out because of new concerns about Hungary.

According to several reports, a spokesman for the new prime minister of Hungary, a member of the European Union that does not use the euro currency, said that talk of a Hungarian default is not "an exaggeration"

Those comments caused Hungary's currency, the forint, to plunge and also led to another sell-off in the euro. At one point, the euro dipped below $1.20 against the dollar, another 4-year low and an important technical milestone on what some experts think is a road to eventual dollar parity.

"The euro has been moving lower and it will continue doing so. The question now is the pace of the decline, not whether it will decline," said Vassili Serebriakov, currency strategist with Wells Fargo in New York.


So what do the latest Europe woes mean for the U.S. economy? It's not great news.

Preston Keat, director of research with political research and consulting firm Eurasia Group in London, wrote in a note Friday morning that Hungary is "not yet in a Greek situation" but it is "wobbly."

That hardly inspires confidence. So any hope that the debt crisis could be contained to the three most troubled of Southern Europe's PIIGS (Portugal, Spain and Greece -- Ireland and Italy are the other two) may have been dashed by the new fears about Hungary.

Maybe it's time for a new acronym? PIIHGS with a slient H for Hungary? That might even be too narrow. If Hungary is in trouble, it stands to reason that other emerging markets in Central and Eastern Europe may also succumb to debt problems.

"Hungary has looked like one of the weaker Eastern European nations for a while and that says a lot since that's an area that has been underperforming for some time," Serebriakov said.

If other Eastern European nations start to wobble, the "healthier" countries in Europe may not be able to stand idly by and watch the continent fall apart.

Dan Cook, senior market analyst with IG Markets in Chicago, said there are growing worries about how much exposure big European banks have to the debt of the most troubled European countries.

So as painful as it may be, the European Union, and likely the IMF as well, might have to step in to stabilize the euro and prevent the crisis from intensifying.

"The reality is that the stronger countries in the euro zone, including Germany, France and the Netherlands, are in much better shape," said John Stoltzfus, senior market strategist with Ticonderoga Securities, an institutional trading firm in New York.

"They are going to have to help their weaker brethren get through this. That means austerity programs, which will shave off growth in Europe's economy for several years," he added.

Julian Thompson, co-manager of the Threadneedle Emerging Markets fund in London, said that this may only be true to a point though. Political pressures could force Europe's more stable countries to only focus on the biggest problems in Europe.

"Hungary, to be honest, is a bit of a sideshow. Spain is more important. The Spanish property bubble hasn't been pricked yet and that's going to put more pressure on the euro for some time," said Thompson.

Regardless of what happens in Hungary though, one thing is clear: Europe is a mess. And continued weakness throughout Europe, at the very least, will make it tougher for the U.S. economy to recover.

It may not lead to a double-dip recession but a sluggish European economy is likely to lead to more woes for companies that do big business in Europe.

In addition to the currency hit that companies will take when they report earnings, the bigger concern is that a slowdown in consumer demand in Europe would mean a lower level of exports to Europe. And that's the last thing that the still-fragile U.S. economy needs.

Reader comment of the week. I wrote about Europe's woes earlier in the week as well. And while much of the focus has been on the precipitous plunge in the euro, one reader astutely pointed out that people need to put the euro's decline in historical context.

"I don't see why people are so alarmed by euro around $1.20, it's right in the middle of its usual historical range ($1.10-$1.30). If anything, the recent pullback is a return to normality assuming it stabilizes a bit. The spikes in the last three years are an anomaly," wrote Iikka Keränen.

- The opinions expressed in this commentary are solely those of Paul R. La Monica.