Tuesday, June 8, 2010

The Next Euro-Zone Domino: Hungary

First, we had the "PIGS" (Portugual, Ireland, Greece and Spain).  Then, with the addition of Italy, the acronym for troubled European countries becames PIIGS.  Hold on a second.  Hungary has applied for membership to this very elite group.  Get ready for PHIIGS.  PHIIGS?

Fears escalated yesterday that Europe's debt problems were spreading beyond the core Euro-Zone after Hungarian officials warned for a second day that the country was at risk of a Greek-style fiscal meltdown.

A government spokesman for new prime minister, Viktor Orban, said on Friday that even default was possible given the economy’s problems.  This sent Hungary's currency, the Forint, tumbling and credit default swaps surging by more than 100 basis points to 425. 

The latest comments are likely to increase skepticism of the new administration among investors.  Markets initially welcomed the center-right party's election victory in April.  However, they have been unsettled by repeated government clashes with the central bank and calls for foreign-currency loans to be converted into Forints.

Hungary's debt last year was 78% of Gross Domestic Product (GDP), the highest among the European Union's newest members.  But it remains very close to the 74% European Union (EU) average, and well below Greece's 115%.

Budapest has yet to draw down all of a €20 billion support package with the International Monetary Fund (IMF) and the EU in October, 2008.  The previous Socialist-backed government last year cut the deficit to 4% of GDP and stopped drawing on the credit line when market conditions improved.

Hungary’s cabinet met for a third day on Monday to discuss a range of fiscal measures designed to trim an estimated 1-1.5%  of GDP.  The government promised to announce its action plan today at the latest.

European problems don't stop there.  Let's not forget Romania.  Analysts have talked down the relevance of Hungary’s problems to others in the region, but neighboring Romania, a fellow recipient of a €20 billion credit line from the IMF and the EU, is suffering from its own set of fiscal problems.

Prime Minister Emil Boc has presented a bill in parliament that would cut public sector wages by 25% and pensions and unemployment benefits by 15%.

The austerity measures are among the most severe in the EU and have unleashed a maelstrom of protest in one of the bloc’s poorest members.  The package will face a vote of confidence next week that could bring down the government, which holds a razor-thin majority.

The government insists that the wage cuts are necessary if Romania is to meet its revised 6.8% deficit target agreed with the IMF and the EU.

Another day, another country in crisis.  Where will it end?  Not with more debt, not with bail-outs.  Only a return to a market-based system with incentives for people to work, rather than retire, will prove to be a permanent answer.  Sadly, all the civil servants, who have enjoyed a cushy ride, are loathe to make the changes necessary. 

Marko's Take

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