Not Making This Up: New European Debt Crisis Is About Hungary
Budapest is a great town and Hungary is a cradle of central European culture, but why did the Hungarian prime minister start talking about debt default? Because there are more weak links in Europe than just Greece.
If you've been busy boning up on Greece and missed this story, then here's a primer. Hungary got into the European Union in 2004 and promptly let go, fiscally speaking. Lack of consolidation in the good years led to high budget deficits in the bad years. Throw in some generalized malfeasance and blatant lies among its politicians and you get a late 2008 bailout package worth €20 billion. Done and dusted, right?
Uh, no. Hungary promised to get its deficit down to 3.8 percent of GDP but is probably now closer to 8 percent. A new government took power in Budapest after elections in April, and Prime Minister Viktor Orban appears to want to pin the current fiscal troubles on the previous government. So, he's gabbing about how talk of a default is "not an exaggeration" because the previous head of government "manipulated the figures." And sure enough, markets are tanking today, while the euro dropped below $1.20 for the first time since 2006. (The best that can be said here is that the yammering about the euro zone breaking up will probably be limited; Hungary still has its forint.)
Lars Christensen, a senior analyst at Danske Bank in Copenhagen with a knack for understanding Europe's periphery, was spot-on in predicting Iceland's crisis. Christensen had this withering statement about Hungary's leaders:
The comments made over the past 24 hours are highly concerning as they not only increase fears in the markets over a possible Hungarian default, but also clearly demonstrate that the Hungarian government has very little understanding of how the financial markets actually work.To understand how dangerous this is, you need to remember that Hungary and its neighbors have banks that are largely owned by western European ones, in particular Austrian banks. (Remember Austria-Hungary, that now-defunct country that the locals call "The Monarchy"?) So, trouble in Hungary adds up to nightmares in Vienna and other spots where banks are exposed. Raiffeisen, a leading Austrian bank, watched its stock sink Friday. Société Generale in France and UniCredit of Italy, also players in eastern Europe, took big hits.
In other words, on top of the losses they are facing thanks to Greece -- which ain't never gonna pay back in full what it is owed to European banks -- European banks now have Hungary to contend with. And, in case you are sitting in the United States feeling calm, remember that American banks are exposed to potential losses of European banks. That's how you get the possibility of a Europe-inspired double-dip recession in the United States.
We live in an interconnected world. And unfortunately, some of those connections go to Budapest.
Related:
- Forget the Unemployment Rate -- It's the Long-Term Jobless Who Should Worry Us
- Europe's Woes Are Pushing Up the Odds of a Double-Dip Recession in the U.S.
- European Rescue Plan, Part Two: What's Missing
- Europe's Problem Isn't the Welfare State -- It's Political Will
- And Now, a New Financial Crisis -- Made in Greece
- Europe's Crisis Will Make Markets Unstable For Some Time to Come