Somebody in Hungary is lying and the euro pays the price

06/04/2010 1:54 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

  Now it’s Hungary that’s talking about default?

Why does Europe remind me so much of the amusement park game Whac-a-Mole these days?

 This morning, June 4, the government of Prime Minister Viktor Orban, said that the economy is in a very grave situation. “I don’t think it’s an exaggeration" to talk about a default said a government spokesman.

It’s quite possible that the comment is nothing more than political posturing. The government, which took power after winning a May election on promises to cut taxes and stimulate the economy, may be looking for a way to get the European Union to let it run a bigger budget deficit. The European Union turned down Hungary just yesterday on that request.

But the comments were enough to set off fears that the euro debt crisis is spreading to Eastern Europe.

Hungary doesn’t belong to the euro currency zone but it is a member of the European Union. The fear, apparently, is that the European Union could be forced to bail out Hungary as it has pledged to do for Greece. It’s pretty easy to understand the basis for that worry: Hungary needed a bailout in 2008 to avoid a default.

On the surface Hungary isn’t in anything like the deep hole that Greece dug for itself. The country’s debt was just 78% of GDP at the end of 2009 compared to 115% for Greece. Hungary is in the fifth year of a cost-cutting plan that reduced the budget deficit to 4% of GDP in 2009 from 9.3% in 2006. 

But the incoming Orban government has charged that the outgoing government lied about the budget deficit. A fact-finding committee is supposed to report on the state of the economy this weekend and the government has pledged to announce an action plan 72 hours after that report.

None of this has done much for the forint, Hungary’s currency, or the euro. The forint was down 2.8% today in Budapest after dropping 2.5% yesterday.

 The euro has hit a new series of four-year lows in trading today and has broken below the $1.20 level that looked like it would provide support for a while.

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