FYI | Jun 04 2010
By Greg Peel
In a world trying to believe the European crisis is coming under control, it was unsurprisingly a shock last night when the Deputy Head of Hungary's ruling party announced the country's economy was in a worse state than expected and that the public finance situation meant Hungary had only a slim chance of avoiding a Greek-style crisis.
The prime minister confirmed he expected a budget deficit of 7-7.5% in 2010 (Greece's is 12-13% before austerity measures).
Hungary is a member of the EU but not of the eurozone, and last night the Hungarian forint fell 2.4% against the euro while the euro fell 0.7% against the US dollar (albeit economic data differences were also in play).
By contrast, the Hungarian stock index fell only 1% which is a bit of a muted reaction compared to what one might otherwise expect. In the meantime, stock markets in London, France and Germany were up around 1.5%. It would seem not everyone is panicked once more.
It all comes down to what the Hungarian government is trying to achieve with this statement, suggests Danske Bank. Hungary's debt problems are not a new issue, although it appears the situation may have deteriorated recently. But what is behind the politics? Is it just politicking?
Danske offers that one of two factors is at play here. Perhaps it is the case that having seen the impact on Greece as a result of the withholding of information by the previous government (it was the new government which found the books to be in a much worse state than it was led to believe), the government is trying to be brutally honest so that help can be at hand before the situation escalates, and not after. After all, Hungary can seek IMF support immediately without common currency issues and the EU would now doubt support IMF involvement since it has called in the IMF over Greece.
Or perhaps it is more of an internal tactic, in that the Hungarian government is actually frightening its own electorate into accepting stricter budget measures. The Hungarian government doesn't have a great reputation, and is known in particular for verbally attacking its own central bank. If this is the case, Hungary is playing a dangerous game with market sentiment.
The government has said that it will shortly announce new crisis measures (perhaps of the weekend). This would help to soothe market fears, Danske suggests, but if the government comes out with an announcement that the budget deficit will be much larger than first thought then it could prove a very critical situation for Hungarian markets and another trigger of global fear over sovereign debt.
Danske can do no more than advise caution. Nevertheless, when you consider that the US VIX volatility index was lower last night, not higher, then one must assume the markets are taking this new development in its stride.
