Fears that Hungary is one step closer to sovereign default, led euro fall to a four year low of $1.20 .It all started when a spokesman of the Hungarian Prime Minister, stated that Hungarian economy  is in a “worst state” than the previous government  indicated, adding that “skeletons where continuously falling out of the closet”.  The Hungarian currency, the forint, felt to 5,6% against the euro and on Friday the Hungarian stock market fell 4 %. Credit default swaps – widely known as CDS- also went higher by one percentage point, making it much more expensive for the country to borrow money from international markets.

According to Peter Szijjarto, the prime minister’s spokesman: “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.” He added: "This is exactly what we want to avoid, and this government is ready to avoid the path that Greece took”. On Thursday, the ruling Fidesz party's vice chairman Lajos Kosa was also reported, saying that the newly elected government had found the public finances in a much worse shape than previously expected and there was only a slim chance of avoiding a Greek-style crisis.

In October 2008, during the Global Financial Crisis, Hungary received a $25bn rescue package (20bn euro)   from the International Monetary Fund, the European Central Bank (ECB) and the EU in an effort to avoid bankruptcy.  In the past few weeks the newly elected government has many times warned that it the 2010 deficit would be higher that the target of 3.8% of GDP agreed with the IMF and the EU.

On Saturday however, the Hungarian government tried to downgrade the situation saying that it aims to meet this year’s budget deficit. State secretary Mihaly Varga said that “The situation is consolidated, and the planned deficit (target) is attainable, but for it to be attainable the government must take measures” and continued adding that “"Those comments are exaggerated, and if a colleague makes them it is unfortunate".  He, however, declined to give an estimate for the 2010 deficit.EU officials also tried to reassure markets on a possible Hungarian financial crisis.

Olli Ren, European Commissioner of Economic and Financial Affair, commented that the situation was “wildly exaggerated”. Speaking at a press conference, in Busan, South Korea -where he attended the G20 meeting – the EU representative said: "Recent comparisons between Hungary and Greece are misleading.” He added that, “Hungary has made serious progress in consolidating its public finances over the last couple of years. Now the Hungarian economy is on the way to recovery and has shown the first signs of strength in the first quarter of this year”. In addition, the Spanish finance Prime Minister Elena Salgado ,speaking on behalf of the EU financial ministers claimed that the  financial situation of Hungary will be examined the following week, when EU representatives are expected to visit the country, adding that is early to say  whether Hungary will need further financial help or not.

The head of the International Momentary Fund, Dominique Strauss-Kahn, though he refused to make any comments, he expressed his surprise about the talks over Hungary.The country is expected to adopt Euro in 2014. Victor Orban, the prime minister, and his government sworn only a week ago. Despite the financial situation, Mr. Orban’s spokesman, Peter Szijjarto, said that the government will still go on with its plans for a big tax cut. A promise made during the election campaign on April. The government is soon expected to present an action plan that will deal with its financial problems. It also intends to publish figures showing the actual state of the 2010 budget early this week. The head of IMF will arrive in Hungary on Monday to meet with the new government.

Switzerland, Austria, Greece.  What seems to also trouble the markets is the fact that, due to low interest rate, many Hungarians chose to take mortgages denominated in Swiss francs. According to the BBC, if forint losses value against the Swiss franc, then Hungarians will have to pay a lot more money on their mortgages. Since the Hungarian currency has already fallen the last few weeks, markets fear that eventually Hungarians won’t be able to pay their debt, leading the country to a banking crisis.

Austria can also be highly affected by the Hungarian crisis, since it has lent a lot of money to the country.

Worries over a Greek style debt crisis in Hungary, has also damaged the Greek stock markets that faced a tremendous fall on Friday. What was highly noted by the Greek media is the fact that, when the newly elected Greek government announced that their predecessors had falsified data, a few weeks past before market started to react negatively. On the other hand in the case of Hungary, the markets reacted immediately, showing how much things have changed.  But what is also worrying for Greece – a country that has just agreed to take some harsh austerity measures in order to receive a bailout package from the EU, ECB and the IMF- is the fact that Hungary, who received a similar package two years ago, still faces significant financial problems and bankruptcy rumors.

Tania Georgoupli/LaSpecula.com

Photo AFP/France 24

(published on June 6,2010)