Will Hungary be the next Iceland?

Photo courtesy of Newser
There are many rumors amid Hungary will be the next Europe Country to go bankruptcy following Iceland meltdown due to its high leverage ratio. According to Newser, The Hungarian government secured a $6.7-billion loan last Thursday from the European Central Bank in an attempt to stave off an Icelandic-style national meltdown. The EU newcomer's troubles derive from loans denominated in euros or Swiss francs, rather than the softer Hungarian forint. Frozen credit markets have left Hungary's government and citizens struggling to repay their debts.

While according to International Herald Tribue, Fitch Rating Agency downgraded Hungary's outlook to negative from stable on last Friday as the effects of the global financial crises increased the country's credit risk. Fitch said global financial turbulence and the likelihood of a recession in the euro zone have increased Hungary's credit risk because of its high external debt, wide current account deficit and large external financing needs. Fitch said Hungary's gross external debt stood at 99 percent of its gross domestic product, one of the highest levels in Eastern Europe.

Photo courtesy of Newser
Some 60 percent of domestic loans by Hungarian banks are in currencies other the forint, mostly Swiss francs and euros, boosting their need for foreign currencies.

Despite cutting Hungary's outlook from stable to negative, Fitch reaffirmed Hungary's foreign currency ratings, saying the response by Hungarian authorities to recent events was strong.

"Hungary's credit ratings are supported by its robust institutional fundamentals, relatively rich and diverse economy, strong debt management capacity and untarnished debt service record," Fitch said.

The ratings agency also welcomed efforts announced by Hungarian Finance Minister Janos Veres to cut the 2008 state budget deficit from the earlier target of 3.8 percent of GDP to 3.4 percent and bring down the 2009 deficit aim from 3.4 percent of GDP to 2.9 percent.

Hungary's short term position is much less leveraged than Iceland's. Hungarian private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, or that short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland.

According to Bloomberg today, Iceland, Ukraine and Hungary are lining up to borrow from the IMF, helping the agency reassert its role as lender-of-last-resort to troubled nations. Strauss-Kahn this month predicted that aid could soar into the "hundreds of billions" from the current $17 billion.

Related Posts :

1. Netherlands Injects ING $13.4 Billion, China's Economic Growth Slowed, South Korea Guarantees Foreign Deposits
2. Iceland Meltdowns
3. George Soros: Global Capital Meltdown

Sources :

1. Newser: Hungary Gets $6.7B Loan to Avert Meltdown, October 17, 08 8:33 AM
2. International Herald Tribune: Hungary's currency, stock market down sharply, October 17, 2008
3. Bloomberg: Strauss-Kahn Gets Trichet's Backing Amid IMF Probe (Update1), October 20, 2008 03:16 EDT

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