The Next Greece? It's Hungary

By Win Thin

An election in a debt-laden European country brings in a new government, which then proceeds to claim that the previous government hid "skeletons" in the closet and masked the true depth of its fiscal problems. Greece? No, Hungary.

In case the parallels were too subtle for the market, Lajos Kosa, the deputy chairman of the incoming Fidesz party, warned that Hungary has a "slim" chance of avoiding a Greece-like situation.

Although he may be indulging in a bit of hyperbole, we do note that Hungary's fundamentals are among the worst in Europe, the Middle East and Asia, with an external debt/GDP ratio of almost 140% in 2009 and a budget deficit that could rise to 7%-8% of GDP this year (vs. the 3.8% target the previous government set with the IMF), according to official Fidesz comments.

Politics is clearly playing a role here, with Fidesz trying to heap as much blame as possible on the outgoing Socialists. After taking power May 29, Fidesz is making it clear that the situation is not going to improve much for Hungary in the near term.

Kosa said that the government will unveil a two-year crisis management plan this weekend and may suspend some constitutional provisions to tackle the problems. This sounds ominous to us and underscores our belief that Fidesz' two-thirds majority in parliament is actually negative for the nation's outlook. Recall that when Fidesz was last in power it planted the seeds for Hungary's current problems by ramping up spending and blowing out the budget deficit.

Hungary has not drawn on any funds from its IMF standby program under its fourth and fifth reviews. That 17-month program was instituted in Nov 2008 and was extended six months to Oct 2010.

Fidesz has talked about a new program but stressed that it wants to renegotiate this year's deficit target to 5%-6% of GDP.

It remains to be seen whether the IMF or the markets will accept this fiscal slippage while other crisis countries in the eurozone are tightening.