Hungary Under the Spotlight… Again?!

Among the EU nations, Hungary has the fourth largest public debt as a percentage of GDP. Compared with the rest of the world, it ranks as fifteenth, based on debt and GDP figures for 2009. Looking at the table below, it seems that Hungary’s 78.00% debt-to-GDP ratio isn’t so bad. It’s just around a fourth of Zimbabwe’s 282.60% reading and is still miles away from Italy’s 115.20% figure!

PoD Chart

But that’s not what euro zone officials are worried about. What they’re looking at is the country’s deficit as a percentage of GDP and, with this metric, Hungary failed to meet euro zone standards. You see, euro zone member nations are expected to keep their deficits below 3.8% of their GDP in 2010. While Hungary is not yet part of the euro zone, it has been trying to keep its finances in check so that they can be part of the cool kids on the bloc. However, Hungary’s deficit is projected to reach 4.1% of their GDP this year. Uh oh…

Before we get to what this means for Hungary, let me enlighten you with a little background check first.

Way back in October 2008, the EU and IMF agreed to give Hungary a loan, in hopes that it would be used to help rescue their struggling economy. The amounts given by the two organizations amounted to roughly 20 billion EUR, with about 8 billion EUR forked over immediately. The rest of the balance would be distributed every three months, based on quarterly reviews on the Hungarian economy by the IMF.

Currently, Hungary has about 5.7 billion EUR available left in the fund, which the government has been able to save for a rainy day as they’ve recently had successful debt auctions. Still, Hungry… I mean Hungarian… officials want the current program to be extended another three months, to push its deadline to December this year.

However, I’m not too sure whether the IMF and EU will be so accommodating this time around. They already extended the program an additional three months from its original deadline. And with IMF official not too happy about the progress of the Hungarian economy, things are looking bleak.

Just this weekend, talks between Hungary and the IMF and EU broke down. Authorities from the IMF believe that Hungary was not doing enough to meet its budget deficit target and decided to postpone their assessment of Hungary’s loan program.

So what if the authorities chose not to review the loan program? Well, in order for more funds to be released to Hungary, there must first be a loan program assessment. If there isn’t one, Hungary won’t get their hands on any remaining funds! Poor Hungary – they were even hoping to ask for another 10 to 20 billion EUR after the existing program expires “just in case”!

More than being a blow to Prime Minister Viktor Orban’s ego, the disapproving tone of the IMF and EU could cause investor confidence to falter not only for Hungary and its currency, but possibly for the rest of Europe Union. Even though Hungary does not use the euro, problems in Hungary could cause contagion fears to come back and weigh on any bullish sentiment towards the euro. This means more losses for the euro, and gains for the safe haven dollar.