On the surface, the Hungarian government looks in far better health than its eurozone counterpart. Government debt as a percentage of GDP is 81.9% against Greece’s 139.9% and its economy grew by 1.2% last year while the Greek economy shrank 4.5%.
Yet despite this, Hungary has this week been forced once again to approach the International Monetary Fund and European Commission for financial assistance. Though both sides claim the support would be “precautionary”, the very fact that it is considered necessary warrants further investigation.
The central problem facing the country is that prior to the financial crisis a combination of a strong domestic currency and high domestic interest rates caused borrowers to take on foreign currency debt. In particular, the low interest rates in Switzerland fuelled a boom in Swiss franc-denominated mortgages and car loans.
In the aftermath of the financial crisis, however, panicked investors have piled into the Swiss franc and the currency has surged to historic levels against the Hungarian forint. This has sent the debt burden on households spiralling out of control and now the crisis is bringing the health of the country’s banking system into question. (Strategy blog continues below)
Those calling for Greece to exit the single currency would be wise to take note. If it were forced out the depreciation of its currency could indeed help plug the competitiveness gap with its northern neighbours but it would also come with a cost.
The Bank of Greece estimates that total outstanding domestic loans to Greek individuals and companies stands at €228 billion. Even assuming a full sovereign debt write off (which could have a destabilising effect in itself) the weight of this euro-denominated debt would cripple households as well as threatening the solvency of Greek banks.
Without wholesale forgiveness of debt the system quickly becomes unworkable. Under such a scenario Greece, along with any other country forced from the eurozone, would be isolated from international funding markets and likely reliant over the medium-term on the very financial support that the market currently begrudges it.
Eurosceptics have enjoyed the travails of European policymakers as they stumble towards a response to the crisis. Perhaps it is now time to stop the back-patting and look at the costs involved in the failure of the single currency.