Colin Barr

Following the money in banking, economics, and Washington

Hungary's economy joins the market goulash

June 4, 2010: 1:07 PM ET

Hungary and its neighbors are well on their way to joining the PIIGS in Europe's economic stew.

Hungary's forint plunged to a one-year low against the euro Friday, after a spokesman for the new government warned that Hungary's economic crisis is worse than previously acknowledged.

On the front burner

The comments raised fears that Europe, still struggling to come to grips with the financial problems on its southern periphery, now must deal with another crisis in the east.

The cost of insuring against a default on Hungarian debt surged 23% to its 2010 high. It now costs $380,000 annually to insure $10 million worth of Hungarian bonds for five years.

Hungary wasn't the only place investors were fleeing, though. CDS spreads shot up as well in Romania, Slovenia, and Austria, and European banks -- long under siege for their exposure to the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) -- sold off as well. Deutsche Bank (DB) and Credit Suisse (CS) each dropped 5% in New York.

Worries about faltering economies in Eastern Europe are nothing new. Hungary accepted $25 billion in aid in 2008 from the International Monetary Fund and European Union, as the country sought to pull back from years of deficit spending.

The result was one of the worst recessions in Europe, with output contracting by more than 5% last year.

But comments this week by Peter Szijjarto, a spokesman for new Prime Minister Viktor Orban, raised worries that previous assessments have been misleadingly optimistic.

"In Hungary the previous government falsified data. In Greece, they also falsified data. In Greece, the moment of truth has arrived. Hungary is still before that," Szijjarto said.

He said plans to bring Hungary's budget deficit under 4% of economic output will fail and suggested the gap could be twice as big.

At the same time, he said the government would move forward with tax cuts in a bid to restart the economy, in spite of the apparent damage this would do to the budget gap. Hungary has one of the highest tax rates on wages in the developed world, the Organization for Economic Cooperation and Development says.

The new government's performance raise fears of both a financial crunch and a policy train wreck, according to a bank report quoted by Reuters.

"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," Danske Bank said.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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