BUDAPEST, Hungary, June 7 (UPI) -- In a bid to bring under control panicking markets, Hungary's new government over the weekend moved to downplay comments by officials that the country faces a Greek-style crisis.
"Any comparison with countries that have much higher credit default swap ratings than Hungary is unfortunate," Mihaly Varga, the chief of staff to Prime Minister Viktor Orban, said Saturday at a news conference in Budapest. "The comments that have been made about this issue are exaggerated."
A day earlier, several officials of Orban's center-right Fidesz party, in power little over a week, compared Hungary's fiscal situation to that of Greece. They warned that the budget deficit might reach 7.5 percent of gross domestic product this year, nearly double the previously announced target. The officials even mentioned a possible state default.
The comments sent markets into a tailspin, with shares on the Budapest Stock Exchange tumbling, the euro falling to a 4-year low against the dollar and Hungary's currency, the forint, dropping 6 percent against the euro. Hungary's credit default swaps, an indicator of how risky investing into a country's assets is, rose to a 12-month high.
In the days since, the Hungarian government of the newly elected Orban has been trying to contain the effects of the comments. Officials vowed that a target budget deficit for 2010 of 3.8 percent of GDP, set by the International Monetary Fund, can be achieved.
"We'll stick to our 3.8 percent budget deficit level for this year. It was agreed by the IMF and the EU and it was also agreed by the Hungarian government so there is no doubt about that, we'll stick to that figure," Economy Minister Gyorgy Matolcsy told CNBC.
Rating agency Moody's as well as investment bank Goldman Sachs confirmed those assurances, saying Hungary is in no danger to go under because it started getting its finances in order as early as November 2008, when it received a $25 billion rescue package from the IMF, the World Bank and the European Union to consolidate its budget. And while Hungary's economy contracted by 6.1 percent in 2009, it should be flat or grow slightly this year.
So why the worrisome comparison to Greece?
Observers say comments may have been made in a bid to prepare Hungarians for painful austerity measures. During his campaign, Orban had pledged substantial tax cuts, a measure that looks unrealistic if Hungary really wants to meet the IMF debt target. Budapest is expected to announce a fresh austerity package Tuesday.
But the political gamble could be a costly one. The most recent assurances that Hungary is much better off than Greece failed to reverse the losses in Monday trading, threatening to turn a communication crisis into a real one: Nearly half of Hungary's debt is denominated in foreign currencies, so a weaker forint immediately increases the country's debt.
