>Is Hungary the next Greece? (DANSKE MARKETS)

• Today, the Hungarian markets came under pressure after Lajos Kosa, Deputy Head of the ruling Fidesz party compared the situation in Hungary with Greece and said the economy was in a much worse state than expected.

• Adding to the negative sentiment were negative comments regarding the budget situation from Prime Minister Orban and State Secretary, Mihaly Varga. Varga said that he expected a budget deficit 7-7½% of GDP in 2010.

• Overall, Hungarian newsflow is quite concerning and even if the negative rhetoric is ‘just politics’ we advise that more bad news might well be in the pipeline. The comparison with Greece might be ‘overdone’, but one can hardly say that public finances are in good shape in Hungary.

Kosa: “Only a slim chance of avoiding a Greek-style scenario”
This afternoon market participants shocked when Lajos Kosa, Deputy Head of the ruling Fidesz party, said that the state of public finances in Hungary was such that Hungary only had a slim chance of avoiding a Greek-style scenario.

It shouldn’t be a surprise to anyone that such comments spook the markets, especially taking into account that Hungarian policy makers do not have a strong track record of being fiscally conservative. However, the key question from our perspective is whether Kosa’s comments were intended to spur the Hungarian electorate into accepting the Fidesz plans to renege on their election promises to loosen fiscal policy, or whether it was just a politician displaying honesty. From a market perspective, neither option is positive. The conclusions are that either Hungary is dangerously close to default, or that Hungarian policy makers fail to realise that political game-playing can have a seriously negative impact on the market. That said, if this is “just” politics, then the impact for Hungarian markets should be fairly limited in the longer run.

So which of the two is it? The answer is that we simply don’t know. The only established fact is that Hungary is in a very fragile economic situation and public debt levels could veer in a clearly unsustainable direction if measures to improve the budget situation are not passed.

Our view is that this clearly has the potential to develop into a very critical situation for the Hungarian markets – especially if Hungarian policy makers do not take more care in terms of their communication. In that regard, it should be noted that we have been concerned about the new Hungarian government’s verbal attacks on the Hungarian central bank management recently. Such outbursts surely also have the potential to spook investors.

To read the full report: HUNGARY & GREECE