After Greece and Portugal, We Have Hungary and Spain

This is like a Euro Soccer Championship gone very bad. We have Greece and Portugal is teetering as well. The EMU stepped in and markets were calmed ... for a while, now the unthinkable is happening, Spain is treading murky waters. It used to be that Spain and Italy were considered much like AIG ... too big to fail. Now we are all not so sure. Spain may still have some time and size on its side, but Hungary looks doomed now and should see fresh funds from somewhere before the end of June.



Sovereign debt worries in Europe have been elevated for a couple of months now, and today Hungary moved into the crosshairs. Sovereign debt default risk as measured by 5-year CDS prices has spiked for Hungary and the countries surrounding it today, but default risk for this region still remains well below levels seen in late 2008 and early 2009.

The first two charts below of 5-year CDS for Austria and Hungary since 2008 highlights this. Greece and Portugal default risk remains elevated as well, but at the moment it is still down from its recent peaks. France also remains elevated, but it is still below highs seen in early 2009.

The same can't be said for Spain, however. Spain default risk reached a new crisis high today, taking out levels seen prior to the trillion Euro bailout. And Spain matters much more than Hungary.

Hungary's fiscal position has improved in recent years, but the public debt burden, at just under 80% of GDP, remains hefty by regional standards. Hungarians overwhelmingly voted for the center-right Fidesz party in April 2010 elections, but questions remain over the new government's fiscal policy agenda. In early June, Hungarian markets reeled amid comments from Fidesz officials that the budget deficit would be much wider than the current 3.8% of GDP target for 2010, leading some to draw parallels with the situation in Greece. However, officials later backtracked on the comments.



On June 3, markets in Hungary came under pressure after State Secretary Mihaly Varga said he expected a budget deficit of 7-7.5% of GDP in 2010. Meanwhile, Lajos Kosa, deputy head of the ruling Fidesz party, said public finances in Hungary were such that Hungary only had a slim chance of avoiding a Greek-style fiscal crisis. In 2009, Hungary narrowly missed meeting the 3.9% of GDP budget deficit target set out under the terms of its US$25.5 billion EU/IMF-led loan agreement. The 2010 budget deficit target is 3.8% of GDP, but it is expected to be renegotiated under the new government.

The European Commission notes that Hungary almost met its budget deficit target of 3.9% of GDP in 2009. Parliament adopted the 2010 budget on November 30, 2009 that complies with the 3.8% of GDP deficit target for 2010 under the country's EU/IMF-led loan program (although the Fidesz government plans to renegotiate this target). Specific measures in the 2010 budget include: "a freeze of the public sector wage bill, reform in the pension system, saving measures in the area of social benefits as well as reduction in the level of housing subsidies and gas- and district-heating supports."

On May 21, 2010, the newly-elected Fidesz government warned that the budget deficit will increase in 2010 due to the discovery of additional debts in the outgoing government's budget. Fidesz officials stated that debts of 170 billion forints (US$757 million) have been uncovered so far, which represent 0.7% of Hungary's GDP, and that additional "skeletons" are likely to be found.