Hungary is Hungary

• We outline some of the reasons why we think Hungary is not Greece.
• However, this does not mean that Hungary does not have other problems - such as concerns over FX loans, banking exposure to the Balkans, rising nationalism and the government's apparent economic populism.
• We disagree with those analysts who claim that recent unfortunate comments are a well-planned political ploy to convince voters to accept new austerity measures. Rather, we think that the comments probably reflect an ill-advised continuation of the election campaign and therefore more 'bad rhetorical surprises' could be in store.

Hungary is not Greece

Officials from Hungary's governing Fidesz party have done a lot to attract the attention of international investors. Unfortunately most of this attention has been negative. Fidesz deputy chairman Kosa's comparison of Hungary to Greece has been the most damaging.

However, Hungary is not Greece in our view. At least not the Hungary of 2010 - maybe in 2006, but not today. There are three main differences between Hungary and Greece:

1. Public debt and the budget deficit are significantly lower in Hungary than in Greece; even in a negative scenario, the budget deficit in Hungary will be around 7-8% of GDP and public debt around 80% of GDP in 2010. That is too high, but Hungary is not close to being insolvent.
2. Hungary does not face any near-term funding needs and the standby agreement with the IMF and the EU reduces any possible liquidity problems.
3. The Hungarian forint is not fundamentally overvalued so Hungary does not face the same need for an improvement in competitiveness via price and wage reductions. Hungary in fact now has a current account surplus, unlike Greece which has a substantial current account deficit.

Mr Kosa's comparison to Greece therefore was wrong and as such should not be a worry for the markets on its own. However, what spooked the markets was probably not the prospect that Hungary could be the next Greece, but rather that policymakers seem to lack an understanding of how to communicate with the international financial markets.

But Hungary is Hungary...and that might be enough to spook investors

Hence, Hungary is not Greece, but that certainly does not mean that all is well. We would highlight four 'trouble spots' in particular:

1. The recent massive sell-off in the forint - especially against the Swiss franc - sharply increases financial vulnerabilities in Hungary as many households (60-70%) and corporations (c55%) have CHF-denominated loans. Hungarian banking stocks have come under serious selling pressure in recent days - undoubtedly as a result of increased worries about FX loans. In addition, the Hungarian media has been speculating that the Hungarian government might increase taxation of the banking sector.
2. The banking sector vulnerabilities are not only connected to exposure FX loans, but also to the Hungarian banking sector's operations in the Balkans - especially in Bulgaria. Here there are clear links with Greece which also has a banking sector with exposure to Bulgaria and other Balkan economies.
3. The newly elected government is significantly more nationalistic than the previous government and has, among other things, given passports to ethnic Hungarians living outside Hungary. This has led to increased tensions with neighbouring Slovakia which is home to a large minority of ethnic Hungarians. The Hungarian government's 'patriotic' rhetoric and actions, combined with the fact that the extremist Jobbik party did very well at the recent parliamentary elections, has probably resulted in many governments in the EU becoming highly suspicious of the Hungarian government. Therefore, if Hungary were to need more financial assistance from the EU, many European policymakers might be very unhappy to lend Hungary a helping hand.
4. Fidesz used to be an economically liberal party. However, in recent years, the party has clearly swung in a decisive more populist direction. For example, Fidesz has been strongly against privatisation implemented by the previous government and has also been strongly hostile in its rhetoric against the 'international financial markets'. This economic populism has also led Fidesz to call into question central bank independence (demanded the central bank should cut interest rates aggressively) and to question Hungary's IMF/EU standby agreement. Therefore, it is hardly surprising that market participants are becoming increasingly worried that a Fidesz-led government will not continue the consolidation of public finances initiated by the previous technocrat-led government.

All these issues in themselves could increase volatility in the Hungarian markets. Or said in another way: Hungary is not Greece, Hungary is Hungary and that might be enough to make investors nervous.

Fidesz's rhetoric is not a clear political strategy

Some analysts and media reports have claimed that recent 'doom-and-gloom' statements from Fidesz officials are a clear political ploy to convince the Hungarian electorate to accept new austerity measures after Fidesz promised tax cuts during the election campaign that it will now have to back away from. We disagree with this assessment. Mr Kosa's comments about Greece last week were not part of a well thought-out political strategy for domestic political consumption. Neither were similarly ill-advised comments from government spokesman Peter Szijjarto. Rather we see these statements as the natural continuation of a very hostile election campaign. Neither Mr Kosa nor Mr Szijjarto gave any thought as to how the financial markets would react to their comments; instead, they were probably just attacking the outgoing government. In that regard, it should be noted the relationship between the main Hungarian parties - the Socialists and Fidesz - has always been very bad and 'slander' is part of the 'normal' political rhetoric from both big parties.

Therefore, we are cautious about putting an optimistic spin on last week's unfortunate comments and we do not automatically assume that the Hungarian government will put forward serious austerity measures. In fact, there are no indications that the Hungarian government is planning any major austerity measures and last week's now infamous comments are not part of a plan to convince anybody that new austerity measures are necessary.

Furthermore, even though international financial markets have now tuned in on 'Channel Hungary', this does not mean that Hungarian politicians will suddenly change their ways and become 'market compliant'. So more bad rhetorical surprises might be in the pipeline - even though Hungary is not Greece.