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January 8, 2012

And Now, Hungary's Got a Major Problem!

While we've been focused on the euro currency countries and their debt problems, interesting developments have occurred in countries that don't have the euro. Hungary is now in the throws of its own, unique economic crisis. The cause of this crisis is the same as many of the euro countries, high government spending and debts, however some of the side effects are very unique to the Hungarian economy.

Since Hungary has its own currency, the country's currency depreciation has been noticeable. In July, it traded at 180:1 with the dollar. As of the end of the week, that trade was around 250:1. Another 10% depreciation in the currency and it will be trading at nine year lows. Unfortunately for the Hungarians, they desperately need a strong currency.

Several years ago, the Hungarian currency was strong relative to other currencies. A trade developed where the Swiss franc offered cheaper financing than the home currency. Many Hungarians took advantage of the cheap financing and took out mortgages, loans, etc. Now, with the trade reversing, consumers are becoming vulnerable.

The cost of the loans has soared with the depreciation of the currency, and there's a fear of increasing defaults across the country. This may be a reason for the Swiss placing a cap on the appreciation of the franc, in an attempt from a default problem. Currently, Hungary's bonds are rated junk by three credit agencies.

There are few crises worse than ones where foreign economic policy or foreign currency play a role in your economic outcome. Hungary is in a tough situation. With it's 10 year bonds trading at just over 10%, the country's government debt is unsustainable. Where the great mystery lies is whether or not a default by Hungary will have a major impact on the euro zone or the world financial markets.

It certainly won't increase investors appetite for government debt.

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