Hungary - A Looming Financial Crisis?

Chaos in Russia does affect Hungary significantly

As the financial crisis in Russia continues unabated, markets worldwide are still on very shaky ground. Record gains and losses over the past weeks attest to the volatility of the global economy. Central and Eastern Europe is especially hard hit, as many investors lump the ongoing crisis in Russia with the rest of the region. And among these countries, Hungary appears to be the hardest hit.

After turbulent sessions last week, Hungary's stock market, the BUX, closed at its lowest level ever, exceeding all expectations. Whereas most other markets have lost most of their gains they had accumulated since January, the BUX has gone even beyond that. At present, it has lost over 50% of its value since its peak in April, closing at a record low of just above 4,000 HUF.

The reaction of financial analysts has been the same: it's because of Russia and Asia. And now with Clinton's troubles in the US, a new element has been added.

While all these factors are acceptable causes, Hungarian experts and politicians still skirt around some of the more pressing issues facing the country's economy. In many ways, Hungarian analysts and politicians are merely parroting what experts elsewhere are saying without seriously examining their own economic difficulties first.

A case in point was three weeks ago when Russian financial turbulence began to make itself felt. The Finance Minister, Zsigmond Jarai, noted with confidence that Hungary would ride out the storm. His conclusions were based on the fact that Hungary's trade with Russia is minimal. He even went on to praise the fact that Budapest was in the position of being the financial capital of the region.

These comments closely mirrored what Wall Street analysts themselves were saying three weeks ago, when they proclaimed that because Russia only represents 1% of world trade it could only affect the global economic situation marginally. Even now, EU political leaders are claiming that the crisis will not affect Europe that badly.

Still, there were some that had warned of dangers ahead. In the US, Alan Greenspan, chairman of the US Federal Reserve Bank, made note in July of the "unrealistic level" of share prices. In Hungary, however, there was never any such warning of the vulnerability of financial markets. When the BUX was at around 9,000 HUF a couple of months previous investors were already waiting with champagne glasses for the moment when it would pass the magic figure of 10,000 HUF.

Of course the moment never came and many can now been seen wandering around the Budapest Stock exchange, dazed and confused. The mainstream media has come out in full force lamenting the sad fact, indirectly laying the blame for the BUX's woes on foreign investors. It has already hinted several times that the depressed market prices will be exploited foreigners, as they now have the opportunity to buy up prime stock at an undervalued price. For the more cynical, financial conspiracy theories have begun to take root.

Meanwhile, serious investigations into the Hungarian economy has been lacking. Contrary to what the government had asserted, chaos in Russia does affect Hungary significantly. Although it has been claimed that only 5% of Hungary's trade is done with Russia, it has been acknowledged that 70% of the country's canned food market is now affected. Likewise, many other companies have had to suspend operations. In terms of foreign debt payments, the Hungarian government refused a Russian offer of raw materials and goods in lieu of cash.

On the domestic front, the government has made some questionable moves which have raised the eyebrows of some economists. While the tax burden was reduced, popular measures such as real-term increases in pensions and tuition-free education for first-degree post secondary students have been introduced without sufficient regard for how the government plans to pay for such programs.

Even in areas where positive expectations exist, problems likewise persist. In the agricultural sector, for instance, the year has seen bumper crops for wheat and corn. In fact, the year was so good that all storage areas are already filled with grain; however, with the corn harvest only weeks away, there is no place to put the corn. To make matters worse, tariffs imposed by other Central European countries on grains and cereals coming from Hungary adds to the dilemma of what to do with all that food.

In the end, while much blame for the country's economic woes can be blamed on a former iron-fisted Indonesian president, an autocratic Russian president, and a sexually promiscuous American president, Hungary needs to also look inward at its own domestic (and regional) policies. In fact, such introspection might reveal not only home-grown shortcomings, but may also provide solutions to help soften the blow of a global financial crisis.