beyondbrics

When Hungary’s new government was elected with a clear mandate – markets cheered. Now, just a few days on from prime minister Viktor Orban taking office, the party’s over, and investors are looking for the exit. Today the stock market fell 3.3 per cent, while the forint sank to year lows.

The market reaction is hardly a surprise after comments from the vice-president of the ruling Fidesz party suggesting that Hungary was going to be the next Greece, and from the prime minister’s office saying a default was possible. But things don’t look that bad, do they?

Neil Shearing at Capital Economics thinks the scare tactics are overdone:

Some perspective is needed. For a start, any comparison with the situation in Greece is a little misplaced. Public debt in Hungary is high, but at 78 per cent of GDP it is well below Greek levels. What’s more, short-term external government debt (i.e. debt due to be repaid to foreign creditors within the next year) is just 2.4 per cent of GDP.

Preston Keat at the Eurasia group agrees:

Hungary is not yet in a “Greek situation”–they have €12bn left from the €20bn IMF/EU package from 2008, and the outlook for deficits and growth are not really so bad.

So what’s all the fuss about?

The government suggests that the official figures released by the previous administration on the country’s debt may not be accurate – making the Greece comparison seem a lot less stretched. Investors will have to wait for new figures due out over the weekend to find out how real that threat is.

But what’s more of an immediate concern is that the comments alone show that the government may be more concerned with political populism than economic prudence.

Keat sums it up like this:

Fidesz does not have a coherent strategy for fiscal consolidation, and markets are now punishing them as a result. In the coming weeks they will need to piece together a credible outline of a plan, or the pain will worsen.

Hungary needs to bring in more austerity measures. Predictions of doom and tumbling markets might make the medicine easier to swallow. But as Tim Ash, global head of emerging market research at Royal Bank of Scotland puts it.:

“The new [Hungarian] government needs to think a bit more clearly about communication with the market. You simply cannot talk like this in these markets.”

So comparisons with Greece – at the moment – look flimsy. But the message is clear – loose lips don’t just sink ships – they can send a currency straight to the bottom too. Hungary’s new government needs to stop talking and come up with a plan.