Friday, June 4, 2010

Hungary like the wolf

Hungary like the wolf: "

THE sovereign debt crisis has a new potential casualty with the new government of Hungary raising the possibility of default. The adminstration may be following the classic path of an incoming chief executive - blame all your problems on the previous management - but needs to learn some market-handling skills. Don't even mention the word default. It is a bit like hesitating when your spouse asks if you're having an affair; your subsequent guilt tends to be assumed. As it is, Hungary can expect to pay more to borrow.

Hungary was expected to have a budget deficit of 4.5% of GDP this year (figures from the Economist Intelligence Unit); that seems to have jumped to 7% on the new government's numbers. According to the OECD, its gross debt-to-GDP ratio is around 90%, the level at which Reinhart and Rogoff argue tends to generate problems. (The country already had one bailout, in 2008.) It is not in the euro zone and its currency, the forint, has been falling since March. Its current account is roughly in balance. Inflation is running at almost 6%, unemployment is in double digits and GDP is forecast to show a small decline this year.

Credit default swaps on Hungarian debt jumped 83 basis points to 393bp, according to CMA Datavision (by way of comparison, Portugal is around 376 and Greece 787). The economy is small (around $150 billion on World Bank figures) but even a small European country defaulting would not be good for sentiment at the moment.


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