 Now it’s Hungary that’s talking about default?
Why does Europe remind me so much of the amusement park game Whac-a-Mole these days?
 This morning, June 4, the government of Prime Minister Viktor Orban, said that the economy is in a very grave situation. “I don’t think it’s an exaggeration” to talk about a default said a government spokesman.
It’s quite possible that the comment is nothing more than political posturing. The government, which took power after winning a May election on promises to cut taxes and stimulate the economy, may be looking for a way to get the European Union to let it run a bigger budget deficit. The European Union turned down Hungary just yesterday on that request.
But the comments were enough to set off fears that the euro debt crisis is spreading to Eastern Europe.
Hungary doesn’t belong to the euro currency zone but it is a member of the European Union. The fear, apparently, is that the European Union could be forced to bail out Hungary as it has pledged to do for Greece. It’s pretty easy to understand the basis for that worry: Hungary needed a bailout in 2008 to avoid a default.
On the surface Hungary isn’t in anything like the deep hole that Greece dug for itself. The country’s debt was just 78% of GDP at the end of 2009 compared to 115% for Greece. Hungary is in the fifth year of a cost-cutting plan that reduced the budget deficit to 4% of GDP in 2009 from 9.3% in 2006.Â
But the incoming Orban government has charged that the outgoing government lied about the budget deficit. A fact-finding committee is supposed to report on the state of the economy this weekend and the government has pledged to announce an action plan 72 hours after that report.
None of this has done much for the forint, Hungary’s currency, or the euro. The forint was down 2.8% today in Budapest after dropping 2.5% yesterday.
 The euro has hit a new series of four-year lows in trading today and has broken below the $1.20 level that looked like it would provide support for a while.
rolfer1,
I expect the euro to see parity with the dollar, possibly within the next few months, although more likely later this year or early next, assuming no major changes for the better or worse.
I’m not sure about $0.89. Something will have to happen for it to drop that far, although I won’t say it’s impossible.
robert1234 – simply, it’s uncertainty. Uncertainty that is causing smart money to reevaluate their global earnings projections for 2011 and 2012 (global growth will be much slower, despite India, Brazil and China, than what was expected as recently as late last year.)
Alpha09 – looks like support at $1.13, then parity, then $0.89 — I placed my Euro short bet early last month and expect to hold it for the summer.
Hungary? Isn’t its GDP only 50th in the world?
BTW, is Hungary one of those “good new entries” to EU that some people had been cheering?
Poland is cooking books as well, hiding the growing deficit with some fancy accounting tricks. It will all start unfolding next year.
blukazam, the euro was in use for financial purposes starting 01/01/1999.
On Main Street, the local currencies disappeared, with a grace period, as of 01/01/2002.
Actually, the date was Jan 1, 2002. My bad.
georic:
I was in Europe when the real conversion of the franc to the euro happened: jan 1 2001. The numbers you quoted were probably the values assigned to the franc with the assumption that would be the numbers when the conversion date occurred. I only recall the numbers were pretty close to $1 = 1 Euro. It could have been a little more in our favor.
I vaguely recall the same thing happened in Greece several months back: reports of progress, reports that ‘the worst is behind us,’ and then, upon arrival of a new government, a review of the finances found things weren’t quite as pleasant as previously presented. (Doesn’t matter if it’s exactly right – the rhetoric rhymes, and the fears echo.)
Alpha09,
4/01/1999: 1 euro = 1.168 $
26/10/2000: 1 euro = .8252 $
15/07/2008: 1 euro = 1.6038 $
4/06/2010: 1 euro < 1.20$
such swings make life difficult for European companies with US competitors.
Some economists say the right value should be around 1.18, as at the outset of the euro.
I wonder what Jim and others think the Euro will bottom out at?
robert1234 – the jobs number showed a much smaller growth than expected. See Jim’s post of the bad number and fears of possible stall in the US economy. If the US recovery story starts to fade, the DIA is going a lot lower than it is now…
Ya ok, but what has caused the DIA to sell of today ? As I look it is down 263 points .
Is it the rise in the dollar ? The jobs number ? Sombody please explain what happenned here ?
I’m net short so I’m not complaining about the Hungarian knuckle head’s comment, well timed.
He probably was well compensated to have those comments hit the news wire before US jobs report.