Hungary Warns of Greek-Style Crisis

Hungary Warns of Greek-Style Crisis
By DAN BILEFSKY and MATTHEW SALTMARSH
Copyright by The New York Times
Published: June 4, 2010
http://www.nytimes.com/2010/06/05/world/europe/05hungrary.html?hpw


PRAGUE — Fears that the debt crisis could migrate to central Europe were stirred Friday after a senior Hungarian government official said the previous government had manipulated budget figures and lied about the state of the economy, but most financial experts dismissed the remarks as a ham-handed negotiating ploy.

The official, Peter Szijjarto, a spokesman for Prime Minister Viktor Orban, was quoted by Bloomberg News and other news agencies as saying that the Hungarian economy was in a “very grave situation.” He even raised the specter of a default, saying such speculation “isn’t an exaggeration.”

His comments followed similar warnings on Thursday by Lajos Kosa, a vice president of the governing center-right Fidesz party, and other officials that Hungary was in danger of suffering a Greek-style crisis, with budget deficits — officially 4 percent of gross domestic product in 2009 — possibly reaching 7.5 percent of G.D.P. this year.

After the comments, the Hungarian currency slid and the yield on benchmark 10-year Hungarian bonds surged, to close at 8.1 percent from 7.4 percent on Thursday. The Budapest Stock Exchange Index closed down 3.4 percent, having fallen as much as 7.1 percent earlier in the day.

For all the alarmism by senior government officials in recent days, however, economists said the country was nowhere near the crisis level of Greece and emphasized that the comments appeared to have been politically motivated to tarnish the previous Socialist government and to give Mr. Orban a stronger negotiating position with the I.M.F.

Mr. Orban, whose Fidesz party won a sweeping victory in April in part on a platform of ending austerity and promoting growth, has indicated repeatedly that he wants the I.M.F. to allow Hungary to run a higher budget deficit than the current 2010 target of 3.8 percent of gross domestic product.

Hungary is among the countries in Eastern Europe hardest hit by the international financial crisis. In late 2008 it was forced to approach the International Monetary Fund for $25 billion in emergency financing. Unemployment has soared to 11.4 percent while the economy s contracted by 6.3 percent last year.

Peter Rona, a leading economist, said the doomsday talk had seriously backfired by spooking investors already jittery over debt problems in the euro zone, potentially depriving Hungary of credit on the international financial markets and undermining the government’s credibility.

“Fundamentally, Hungary’s economy is nowhere near the debt level of Greece, and it has more than enough money to service its debt, while I don’t think there is a data integrity problem,” he said. “But the government has shown itself to be a bunch of bunglers and amateurs when it comes to communicating with financial markets, and it will now face a challenge to convince the markets that Hungary is heading in the right direction.”

Mr. Rona added that the government’s credibility had been further dented by its pledge on Friday to slash taxes, even as it compared Hungary’s economic situation with Greece. “Their economic plans and statements are confusing and contradictory.”

The comments from Hungary “reminded investors of what happened in Greece,” said Martin van Vliet, an economist at ING in Amsterdam. “The bond markets are still hyper-sensitive to any bad news on sovereign debt.”

In Athens, it was a new Socialist government that blamed the previous administration for lying about the state of the finances, leading to substantial upward revisions in the country’s deficit projections.

Nigel Rendell, a senior emerging markets analyst at RBC Capital Markets in London, said the Hungarian comments appeared to have been aimed at a domestic audience by a “naïve” official.

In fact, since receiving the I.M.F. aid, Hungary appears to have made good progress in controlling its deficit, he said.

According to European Union figures, the country’s budget deficit was stable in 2009 at 4 percent of gross domestic product, higher than the 3.8 percent a year earlier but well below 2006 and 2007 levels. Its total debt was equal to 78 percent of G.D.P. last year, about the same level as France.

“It takes years to build credibility, and that can be destroyed in days,” Mr. Rendell said. “They should have known better. They have damaged themselves, and it may take many, many months to recover.”

The new Hungarian government was sworn in just last month. A government fact-finding panel will present a preliminary report on the state of the economy over the weekend, to be followed by a government action plan, Mr. Szijjarto, the spokesman, said.

Dan Bilefsky reported from Prague and Mathew Saltmarsh from Paris.