Yikes! There seems to be another case of sovereign default brewing in Europe. This time, it’s in Hungary.
After all that mayhem in Greece, debt problems seem to be the number one issue on traders’ minds lately, that even the slightest news of a likely default could cause a wild move in the markets. Although Hungary isn’t part of the euro zone, the risk of another fiscal crisis in Europe revived fears of a debt contagion to its neighbors.
The reemergence of fears on Hungary’s financial position was triggered when the country went over the 3.9% GDP budget deficit initially made with the European Union and the International Monetary Fund. Although an improvement from last year, its public debt of 80% of its GDP is still very large compared to other nations in the region.
As of February, Hungary’s budget deficit has already reached almost half – 40% to be specific – of its target for this year. If you were to annualize that, you’d end up with a budget deficit more than two times the target! This means that, without loan renegotiation and some serious austerity measures, Hungary will surely go over the limit set out by the EU/IMF.
With the deficit expected to widen further, the question I ask is this: Just how high is it projected to go?
Early last week, government officials discovered some bones when they were digging around the garden. Apparently, the government owes $757 million more than initially accounted for, which is equal to about 0.7% of GDP. Is there more from where this came from?
Doing some simple math and allowing some room for other unexpected findings, I dare say that we could see the deficit stick just under 5.0% of GDP. This might even be a little optimistic! According to State Secretary Mihaly Varga, their public deficit could swell to as much as 7.5% of their GDP!
Sure, this is nowhere near the double digit deficits that Greece has been posting, but that doesn’t mean it won’t garner as much attention as Greece did when all their debt problems started hitting the headlines.
Way back in November, nobody had any idea how serious the problem was going to be. The euro was climbing to new highs versus the dollar and it looked like Europe was on its way to recovery.
And where are we now? Seven months later, the EU just agreed on a $1 trillion bailout package, while the euro has dropped 30% in value! The EURUSD is now fallen below the 1.2000 mark, a level it hasn’t visited in four years!
As I’ve said time and again, these are unprecedented times and nobody knows what’s coming next. And from what we’ve gathered so far, what happens when uncertainty hits the markets? Traders jump all over the safe-haven bandwagon of the dollar of course!
Even though Hungary does not use the euro as its currency, it is still part of the European Union. This means that contagion fears may continue to dominate the market, which could weigh down any bullish sentiment towards the euro. Be careful out there!