Hungary is not the next Greece – but that gives only limited comfort

First of all, the gross debt is almost twice as high in Greece (133% vs 79% of GDP) and whereas IMF expects it to increase to almost 150% in Greece by 2014 it is expected to decrease by more than 10 percentage points in Hungary during the same period. Secondly, the structural budget deficit is significantly higher in Greece; the IMF argues that the required fiscal adjustment in Greece is 9.2% over the next ten years, compared to none in Hungary. There are two main reasons behind these differences. Hungary did not build up such huge imbalances in the first place and, secondly, started the adjustment already a few years ago. Moreover, Hungary already has an IMF program in place and the population is more willing to accept budget cuts. 

There is, however, reason to be concerned about the economic situation in Hungary. The reasons behind the nervousness on the market this week are statements from government representatives that the budget deficit may be over 7% this year rather than the previously announced 3.8%.The representatives also made a series of unwise statements with references to Greece and criticism of the former government’s deal with the IMF, which frightened the financial markets.

The deficit is likely to fall somewhere between the old and the new forecast as the latter is a worst case scenario. We can only speculate about the reasons for the statements but they were most likely intended for domestic political consumption. The incoming right-wing government probably feels the need to prepare the ground for a tougher fiscal outlook (less expansionary policies and more cuts) than promised during the election campaign and then it is quite effective to use Greece as a deterrent and blaming the IMF. It is very unwise to do so though as financial markets are extremely nervous at the moment. And the Hungarians did not only do it once (on Thursday) but a second time (on Friday). That the Hungarian economy is weak was known before this week, but that the incoming government is so ignorant about how financial markets work is new and worrying indeed. The irony is that the government is probably planning to do more fiscal adjustment and that should be welcomed.