Before I give you the 411 on what’s happening right now with Hungary, let’s have a little history lesson.
Way back in October 2008 when the Hungarian economy was on the verge of a financial meltdown, the EU and the IMF agreed to a loan package for Hungary worth about 20 billion EUR. Immediately, 8 billion was handed over, and the remaining balance was set to be given every three months based on reviews by the IMF on the Hungarian economy.
Fast forward 20 months later, Greece had just gotten bailed out and Hungary took center stage, thanks to its deficit problems. At the time, Hungary’s deficit was projected to hit 4.1% of GDP for the year, which put it past the 3.8% threshold mark that was detailed in its loan agreement.
This led to some questioning from the EU and IMF, as the higher deficit percentage sparked concerns of another sovereign debt default. There wasn’t even a good cop – bad cop scenario because talks between officials from all camps broke down like a house of cards! In the end, Hungary was left without access to the remaining portion of the loan.
Without any external help, Hungary has resorted to trying to solve the problem on their own – to the dissatisfaction of a few market players.
Earlier this week, credit ratings agency Moody’s dropped its axe on Hungary and downgraded its sovereign credit rating by two notches to Baa3, a hair’s breadth away from junk status. To add insult to injury, it also kept the outlook for future ratings to negative. Yeouch!
Apparently, Moody’s wasn’t too excited over Hungary’s flyin’ solo decision-making after the 25.1 billion USD loan it got from the EU and the IMF expired in October 2010. According to the report, the government is planning on directing income from pension contributions to its pockets. This would help the government with its ginormous debt, but the expense of paying future pension liabilities could end up burning the government’s pockets.
More importantly, investors are worried that instead of implementing tight austerity measures like other European nations, Hungarian officials are pumping out short-term measures like tax increases on specific industries to reduce its budget deficit. Many feel that this overdependence on band-aid-type solutions is not sustainable. They fear it could choke the economy’s growth and make it more vulnerable to shocks in the global economy down the line.
I know you must be wondering, “Why should I even care about what’s happening in Hungary? It’s not even a part of the euro zone!”
Right you are, lad! Seems like someone has been reading the School of Pipsology!
Even though it has its own currency and isn’t a part of the big “EZ,” developments in Hungary are noteworthy because it conducts a huge chunk of its trade with neighboring euro zone nations. As such, they account for a decent-sized demand for euros. Besides, it’s also a member of the European Union (EU)!
With its finances in such a mess, a bailout for Hungary isn’t entirely out of the question. The problem with this is that it has the potential to rock the entire union, including euro zone countries. After all, it would be reasonable to expect finance ministers to tighten up and impose stricter rules and regulations for EU member nations if Hungary were to get bailed out. They may even consider an expansion of the European Financial Stability Fund, which was created to help financially troubled countries, just to be safe.
Obviously, none of this helps calm contagion fears, and it paints an even darker outlook for the euro. Think about it. Who would want to hold on to the euro when the EU has the unenviable task of having to shoulder the burden of economic problems both within and outside the euro zone?