Hungary’s comments on debt crisis, soaring budget deficit rattle markets, euro drops sharply

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Hungary’s deficit talk rattles financial markets

BUDAPEST, Hungary — Hungary’s currency, bonds and stock market reeled Friday as the new government tried to reassure investors that it was not about to slide into a Greek-type crisis despite official comments that the economy was in serious trouble.

Fears that the economic peril could spread weighed heavily on the euro. The currency dropped below $1.20 for the first time in more than four years, falling to as little as $1.1994 in late European trading before edging back up to $1.2006. That was its lowest level since March 2006.

On Thursday, Lajos Kosa, deputy chairman of the governing Fidesz party, said Hungary was facing a Greece-like financial meltdown. And former Fidesz finance minister Mihaly Varga said the deficit could reach 7-7.5 percent of GDP, about twice as much as planned for 2010 by the previous government.

The new government was sworn in Saturday and its talk about a massively revised budget gap was eerily similar to the situation in Greece. There, the 2009 deficit went from a planned 3.7 of GDP to 13.6 percent of GDP by year’s end and led to the financial crisis, which saw Greece get a €110 million ($134.95 million) rescue package from the European Union and the International Monetary Fund to save it from bankruptcy.

International markets reacted quickly to the parallels drawn between Hungary and Greece, evidence that concerns about budget deficits in Europe continued to worry the markets.

In an effort to calm the markets, the National Bank of Hungary released a statement late Friday in which it estimated the 2010 budget deficit at 4.5 percent of GDP and said it “remains committed” to its inflation target of 3 percent.

Analysts were at odds over the reasoning behind the Hungarians’ original dire remarks.

“At best, they appear a somewhat careless attempt to buy domestic support for a renewed fiscal squeeze,” said a note from Neil Shearing, Senior Emerging Market Economist at Capital Economics in London, adding that “at worst” they were signs that the new government would abandon budget discipline and implement voter-friendly measures.

These could include lower taxes, large construction projects or higher wages and pensions.

Hungary’s forint weakened substantially, falling more than 2 percent Thursday and nearly 3 percent Friday, to around 287 forints per euro. The BUX, the benchmark index of the Budapest Stock Exchange, was also down over 3 percent Friday. Trading in the shares of OTP Bank, Hungary’s largest bank, were temporarily suspended after falling more than the daily limit of 10 percent.

“The government is ready to avoid the Greek path,” said Peter Szijjarto, the spokesman for Prime Minister Viktor Orban, while at the same time saying the Hungarian economy was in a “grave” situation.

Varga is in charge of a fact-finding panel that is expected to present a preliminary report on the state of the economy, likely during the weekend, to be followed within 72 hours by a government action plan.

Hungary received a bailout of 20 billion euros ($27 billion) from the IMF, the World Bank and the EU late in 2008 to help it avoid a default on its loans, as investors, already affected by the global downturn, turned their backs on Hungarian bonds and made it hard for the country to obtain the money needed to pay back its debts.

Until last week, the country was run by Gordon Bajnai’s “crisis management” government, after Socialist Prime Minister Ferenc Gyurcsany resigned in April 2009.

Gyurcsany had gained international renown as the “lying prime minister” after the broadcast in September 2006 of a leaked speech in which admitted to covering up the true state of the economy to win the elections earlier that year. Riots calling for his resignation further eroded his credibility and he was unable to push through the economic reforms Hungary needed.

Bajnai succeeded in bringing some stability to the Hungarian economy through tax increases and other austerity measures, but Fidesz claims that “skeletons are falling out of the closet” and that new facts affecting the budget deficit are being uncovered.

Szijjarto said Kosa’s statement was “no exaggeration.”

He also echoed statements from several government officials that the budget deficit of 3.8 percent of gross domestic product — as planned by the previous government and endorsed by the International Monetary Fund — was unrealistic.

Despite the crisis, the center-right Fidesz government, which won a landslide in April’s elections, plans to keep its campaign promise and implement tax cuts, Szijjarto said.

Some analysts said the politicians’ statements seemed exaggerated, as Hungary’s public debt of 78 percent of GDP was high but well below Greek levels.

“Any comparison with the situation in Greece is a little misplaced,” Capital Economic’s Shearing said, noting that Hungary’s short-term debts, those which needed to be repaid to foreign creditors within the next year, equaled just 2.4 percent of GDP.