Hungarian Crisis?

The Austrian School is a venerable tradition in economics, albeit one antithetical to this blog’s perspective. But it became apparent this morning that we should instead have been studying Hungarian economics.

As far as I can tell, a vice-chairman of Hungary’s right-wing governing party (not a government official) made some loose remarks about public finances being so bad that the country might default on its debt. When asked about these comments, the Prime Minister’s spokesman mostly tried to blame the previous government.

That is a familiar story in many jurisdictions: a new government comes in and bemoans what a mess its predecessor made of public finances. It is just unfortunate that this particular episode of Hungarian politics played out while financial markets were on edge about European public debt.

However, even if we put aside the politics, the economic analogy between Hungary and Greece seems ridiculous for a couple of reasons.

1.) Exchange Rates

A time-honoured technique for countries to manoeuver out of economic and fiscal jams is devaluing the national currency. A major constraint on Greece (and the other PIGS: Portugal, Ireland and Spain) is being locked into the Euro. Greece must navigate between two painful and disruptive options: “devaluing” its domestic economy or pulling out of the Euro altogether.

While Hungary is a member of the European Union (EU), it is not part of Europe’s monetary union. Hungary has a national currency, which it is free to devalue. No matter how bad things get in Hungary, it will not be pulling out of the Euro (because it is not currently in the Euro).

2.) Debt Size

Greece has a national debt (2009) of 273 billion Euros, about 115% of its GDP. By comparison, Hungary’s debt-GDP ratio is much lower, at more like 80%.

Since Hungary’s GDP is also much smaller, its total debt is but a fraction of Greece’s debt. Hungary’s national debt (2009) is 20,421 billion Hungarian forints. That sounds astronomical until you consider that it takes almost 300 forints to buy one Euro.

At current exchange rates, Hungary’s national debt is about 68 billion Euros. So, Hungary’s debt is only one-quarter of Greece’s debt.

The EU has established a “Special Purpose Vehicle” to lend up to 440 billion Euros to member states. Currently, that vehicle is available only to members of the monetary union.

However, the European Central Bank could still buy Hungarian bonds. Even if it bought up Hungary’s entire national debt, that would amount to just 15% of the Special Purpose Vehicle.

In conclusion, Hungary’s debt problem is totally manageable. Hungary and the EU have ample policy tools to address it. We just have to hope that goofy political rhetoric from Hungary’s right-wingers and EU foot-dragging do not turn this molehill into a mountain.

Note: My debt and GDP figures are from this report.

4 comments

  • I think the issue for Hungary is that it has debt denominated in foreign currency amounting to about 55% of its GDP, all sectors included – households (lots of mortgages in Swiss francs), business, government. This totals perhaps $70 billion US as far as I can tell. Not a very big number in fact.

    As the value of its currency declines the ability for Hungarians to repay declines as well, increasing default risk. It seems the fear is that Hungary is indicative of problems in the former East bloc countries which hold $1.3 trillion, which is a very big number for European banks.

    For Hungarians it was risky to borrow in foreign currency since there was always a chance their currency would depreciate. Apparently they were lured into what amounts to currency speculation by low interest rates for Swiss franc loans.

  • Good idea to include sources as you did: Central Bank of Hungary, Report on Financial Stability (page 71, chart 7) at
    http://english.mnb.hu/Engine.aspx?page=mnben_stabil&ContentID=14053

    and
    http://in.reuters.com/article/idINIndia-49057820100604

  • To the extent that Hungarian debt is denominated in foreign currencies, devaluation is no panacea. But I think the point stands that Hungary has much more flexibility than Greece in this regard.

    Financial markets are panicked about European sovereign (government) debt. The chart to which you refer seems to show that foreign-denominated debt is only a small fraction of Hungary’s sovereign debt. Specifically, the Hungarian government’s open foreign-exchange position is just 10% of GDP.

    The other 45% appears to reflect foreign borrowing by Hungarian households and businesses. You may be correct that this private debt is also a huge problem.

    However, post-2008, one would hope that European banks have already taken account of this private debt’s riskiness. The new threat is that formerly “safe” government bonds are suddenly perceived as “risky.” That is the reason for focussing on sovereign debt (as opposed to private debt).

  • Mekonen Haddis

    The role Of Neo-Liberalism, in widening the income gap between the rich and the poor.

    June 5, 2010 by politicalsnapshots.wordpress.com

    The role of Neo-Liberalism, in widening the income gap between the rich and the poor.

    “One of the most pronounced effects of Neo liberalism is to create wealth inequality within national borders and between states. Within a decade of adopting free market policies, the class divide in the US and UK became significant.” Professor G. William Domhoff. UC @ Santa Cruz.
    It is just another indictment of Neo liberalism and its multi-faceted destructive policies encumbered upon people of the world. It is very fascinating to note, that the income gap between the poor and the rich has more pronouncedly been evident in the US and UK, the joint creators of Neo liberalism.
    This enormous income gap between the rich and the poor in the US has concentrated more power in the hands of the rich and has created a feeling of helplessness on the majority of American citizens who have been marginalized by Neo liberal policies.
    Consequently, sooner or later, the question will arise, whose country is it anyway? It is obvious that the widening of the income gap in the US is close to the breaking point. It is not if, but when it breaks, no one can forecast how it might end. It is just that the Corporations are blinded by greed, and our representatives are muzzled by big business.
    Writing on the subject of Neo liberalism’s impact on social cohesion, David Coburn, from the University of Toronto writes: “While it has been asserted that neo-liberalism produces a lowered sense of community it might also be argued that the rise of neo-liberalism is itself a signifier of the decline of more widespread feelings of social solidarity. The political rise of neo-liberalism is freighted with a more individualistic view of society and, perhaps, itself reflects a decline in the notion of we are all in the same boat. Not only do neo-liberal policies undermine the social infrastructure underlying social cohesion but neo-liberal movements themselves are partial causes of the decline of a sense of social cohesion.”
    It is absolutely frightening, what Neo liberalism is doing to societies. It is corroding the very fiber that societies are built upon. Neo liberalism is cancerous. It is undermining our Democratic system. When a government becomes a by stander when millions are practically becoming paupers, while the few are amassing billions, then, the people have no protector. Laws, Rules and Regulations are in the books only to protect the interest of the rich.
    In a wonderful article entitled, “Skewed Wealth Distribution and the Roots of the Economic Crisis”, David Barber, a Professor at the University of Tennessee, wrote:

    “And what is true in the United States of the unequal distribution of wealth, and of the consequences of that unequal distribution, is true again on a world scale. This super-poor mass of humanity, from whose soil is ripped vast amounts of mineral and agricultural wealth, and out of whose labor the world’s manufactured goods increasingly come, are almost wholly excluded from participating in the world’s market economy”. So, what is to be done?
    While a number of social scientists have forwarded divergent solutions for anarcho-capitalism to save itself, Professor Michael Rustin at the University of East London suggests the following points are “made necessary by the implosion of the neo-liberal system in the current financial crisis, and are needed to construct a new post-neo-liberal phase of democratic capitalism”.
    The five points he has put forward are the following:

    (1) A more active role for governments in regulating markets, and especially global financial markets

    (2) Constitutional reforms which enhance democratic processes and civil liberties, and create more representative and pluralist systems

    (3) Policies, which reduce inequalities, and give greater weight to social justice and social inclusion.

    (4) The enhancement of the capacities of international institutions, and especially the EU, to maintain economic stability and growth

    (5) Programmes to address the problems of climate change.

    Very sensible, are they not? But Wait!!! We have to see which governments have any backbones left in them to try and regulate the market, and do away with thirty years of destruction of the people that started with Reagan and Thatcher.

    As I am ready to post this article, I hear a news story that stated that “Hungary might default on its debt”. What is the world coming to. Wasn’t Hungary the darling of the West? Didn’t it do everything that it was asked to? It privatized everything. It reduced government employment. It cut welfare as it was told to do by “free Market Reform” advisors. Hungary did everything a good and obedient follower of Neo liberalism is supposed to do. Yet, it is threatening to “default” on its debt in spite of a $24 billion IMF and EU loan few months back. This is the fruit of Neo Liberalism.

    Do you wonder, which devoted and submissive follower of Neo liberalism will bite the dust, next?

    Professor Mekonen Haddis.

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