Hungary may be first in EU to default ahead of Greece

Greece looks to be heading for a default in March unless unions can be persuaded to agree to draconian cuts. But the cost of borrowing in Hungary is soaring and the IMF loan that saved the country in 2008 comes due in February.

That may leave Hungary the first nation in the European Union to default on its debts ahead of Greece. The possible default by this Central European country rattled stock markets in France and Germany yesterday with worries about the contagion effect on the regional banks.

Problems mount

It was not a good day in the eurozone with Italian bank UniCredit forced to take a massive discount on a rights issue and reports that Spanish banks will need to raise $80 billion for write downs against property losses.

The Daily Telegraph reported that IMF and EU officials are due to resume talks with Hungary about refinancing an $8 billion loan on January 11th. But constitutional changes affecting the Hungarian central bank have compromised negotiations and the outcome is by no means certain.

At the same time Lucas Papademos, Prime Minister of Greece, is warning of an ‘uncontrolled default’ in March unless unions agree to pay cuts. This sounds innocuous until you stop and think how likely unions are to agree to this in the current hostile atmosphere. Greek officials say they will ‘crash out of the euro’ without it.

Overnight deposits with the European Central Bank by the region’s banks are now higher than ever and close to the $645 billion lent to the banks by the ECB in an emergency program before Christmas.

ECB support

Banks remain very reluctant to rely on their respective creditworthiness because they do not know who is holding the most bad debt. Only the ECB is keeping the system afloat.

US investors are sick and tired of hearing about the eurozone crisis and want to get on with their domestic recovery. But if it was not for the potentially catacylsmic debt issues in the eurozone then the focus would be on America’s own unsustainable debts that are now over 100 per cent of GDP (click here).

It is the US recovery that is a charade not the eurozone crisis which is frankly only too real.