Last week, Hungary was insisting it could stand on its own two feet. Now it has officially requested ‘precautionary’ assistance from the International Monetary Fund and the European Union.
The country had little choice. Its spiralling borrowing costs have threatened to shut it out of the market. Money has fled the country amid fears that its sovereign debt will be downgraded to junk status. Last week, Hungary paid 6.71% to borrow money over three months. The yields on its two-year debt have soared by two percentage points to 7% since the late summer. The local currency, the forint, has slumped to a record low against the euro.
Eastern Europe always appeared to be the most vulnerable emerging region to the euro crisis. One problem is the region’s close trade links to the eurozone. Another is its relatively high external debt, says Capital Economics. The banking system holds large amounts and much of it needs to be rolled over continually because maturities (borrowing periods) are short. Now western European banks are cutting back on lending so as to meet tough new capital targets, threatening a credit crunch in the east as local banks’ financing driesup. With short-term external finance worth 18% of GDP, the Hungarian banking system is the region’s most exposed in this regard.
A further problem is that a huge chunk of household debt is foreign currency-denominated. That squeezes consumption as the forint tanks and mortgages get pricier, threatening growth, which is already stalling. It has also increased speculation that the central bank will have to raise interest rates to stabilise the currency. “Hungary is in a classic foreign-debt vice,” says Ambrose Evans-Pritchard in The Daily Telegraph.
“Unorthodox and controversial policy choices” by the government have rattled investors too, said Michail Diamantopoulos of Investec Asset Management. These include measures such as nationalising pension funds. Tot it all up and Hungary is “the country where the risks are most acute in the region”, says Neil Shearing of Capital Economics. That makes it “a warning sign” for the rest of emerging Europe. “We fear this may spread to the Ukraine and the Balkans.”