The Hungarian Debt Crisis: Deserved or Characteristic Pessimism?

IMF dismisses Hungarian debt crisis claims
Posted June 8, 2010

The International Monetary Fund (IMF) has dismissed comments by Hungarian officials that the country faces a Greek-style debt crisis.

At a meeting with Luxembourg's prime minister Jean-Claude Juncker - who heads the Eurogroup of finance ministers - IMF chief Dominique Strauss-Kahn said Hungary's finances pose "no special reason for concern".

Mr Juncker echoed the IMF's thoughts, saying he did not see a problem with Hungary, only with its politicians, who he said talked too much.

In an attempt to shed some light on the Hungarian economic situation which Hungarian politicians I do not understand, I conducted a mock interview with google search and the (small) part of my brain that remembers I was an econ major.

Q: What exactly is a debt crisis?
A: A domestic debt crisis occurs when a country cannot service its debts due to lack of access to capital. Because lenders are less willing to lend to countries at risk of default, a debt crisis is self-fulfilling. Think of it in terms of The Real Housewives of New Jersey: Danielle is a struggling country on the verge of sanity default, and the capital is friendship. (Theresa would have been too obvious an example.)

(Rhetorical) Q: I thought Hungary already had a debt crisis.
A: Hungary was the first EU member to obtain a bailout in 2008, lining up $26.9 billion in emergency loans after investors cited the country’s heavy foreign-currency denominated debt. While initially the foreign loans provided access to “cheap” capital, Hungarians increasingly were exposed to rising debt payments as the forint fell against the euro and the franc.

Q: So why the recent panic?
A: Until last week, Hungary was run by Prime Minister Gordon Bajnai’s Socialist government, who succeeded in bringing some stability to the Hungarian economy through the bailout funds and tax increases and other austerity measures. As a result, Hungary reduced its budget deficit to 4% of GDP in 2009 from 9.3% in 2006. However the newly elected, right-wing Fidesz government now claims the former government had manipulated budget figures and lied about the real state of the economy.

Q: How does Hungary compare to Greece?
A: Greece’s 2009 budget deficit was 13.6% of GDP versus 4% in Hungary, and Hungary’s external debt is about half that of Greece. Furthermore, Hungary is outside the euro zone and therefore not bound by its one-size-fits-all monetary policy, giving the Hungarian central bank more flexibility to respond to the ups and downs of the economy.

Q: Comparatively things don’t sound too bad. Is this just a case of Hungarians being typically pessimistic?
A: Although the budget deficit may be manageable, the Hungarian economy remains vulnerable. In recent years millions of Hungarians took advantage of cheap Swiss and Euro-backed loans to finance cars and houses and are now facing foreclosure. Imminent defaults are compounded by an unemployment rate hovering around 12% with little hope of improvement due to government commitments to cut spending as part of the bailout fund package.

Q: What next?
A: Although in a better position than Greece, Hungary is fighting an uphill battle. For an economic turnaround, the country needs fundamental and sustainable changes: right-sizing the budget, the return of foreign investment, and job growth stimulus. In a government as bureaucratic and corrupt as Hungary’s, this will be a Herculean task.