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By: Dr. Mike Campbell
Hungary joined the European Union in 2004, just 15 years after leaving the communist block and emerging from behind the Iron Curtain. Whilst the nation is an EU member, it did not join the Eurozone and has retained its own currency, the Hungarian Florint. At the time of joining the EU, the exchange rate was 251.55 HUF to the Euro. In the depths of the financial crisis, it appreciated to 230.13, but as the sovereign debt crisis has swirled, the Florint has fallen to a record low of 314.77 to the Euro, a depreciation of more than a fifth. In the past 12 months, the Florint has devalued by 12%.
Hungary has its own debt problems with the level standing at 82% of GDP. The cost of borrowing has soared as investors demand higher levels of interest to compensate for increased perceived risk on Hungarian government bonds. Currently the yield is over 8%, but this is two thirds of the record level of 12.47% seen in March 2009 – however, levels above 7% are widely regarded as unsustainable.
Many Hungarians have taken advantage of “cheap” foreign mortgages on their homes, so depreciation of the Florint against these currencies makes these loans more expensive.
Hungary has approached the EU and IMF for financial assistance. It is hoping that any financial assistance it gets can be used to spur growth and will not require further austerity measures to be taken. This would be Hungary’s second IMF loan, if it gains approval. The government has acted to increase its revenues with a banking tax and effective nationalisation of pension funds. Whilst austerity is seen as an effective way to battle the debt burden, the reduction comes at the cost of economic growth. In many countries, growth is already weak and unemployment high, so a viable alternative would be highly appealing.
Ratings agencies are threatening to reduce Hungary’s credit rating further to “junk” status which is likely to force up borrowing costs.
