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Moody's announced on Friday, Nov. 25th, that it was downgrading Hungary's debt down to junk status, something that undoubtedly added to the market's unease. Hungary, while in the EU, is not a member of the Eurozone, so one might be excused for thinking this matters not a whit to the Euro, and the on-going crisis.

Unfortunately, things aren't quite that simple. The reason that Hungary is yet another straw added to the back of the camel known as the Euro, is the fact that Austrian banks have a notably large exposure to Hungarian debt.

The 4 largest Austrian banks are the Erste Group Bank, Raiffeisen Bank, as well as the smaller Osterreichische Volksbanken AG, and a unit of Italy's Unicredit S.p.A., Unicredit Bank Austria AG. While the widespread flight from anything remotely resembling dubious sovereign debt has already caused capital shortages for the above mentioned banks (writedowns ranging from 1.5B Euro up to 4.5B Euro for Bank Austria), the expansion of these banks into Hungary, as well as Romania, led them to engage in subprime lending in real estate. (Sound familiar?) To quote from the tagline of a TV commercial for Raiffeisen Bank,

"We don't care about your monthly wage. All that matters is the property's value".

Adding insult to injury, many of the loans were denominated in Swiss francs, rather than in the Hungarian forint. As the Sf appreciated as a result of the flight to safety, borrowers became even more deeply "upside down". Meanwhile, Hungary's government didn't take Moody's downgrade of its debt laying down. Recently elected Prime Minister, Viktor Orban denounced the downgrade, and unilaterally allowed Hungarian debtors to repay mortgage loans in forints, resulting in an immediate 20% haircut for the banks holding those mortgages.

I'm of the opinion that Austria is too close to the comparatively healthy northern "heartland" of the EZ, and the careful reader will also note that a subsidiary of an Italian bank (from one of the countries "Too Big To Save") is also heavily exposed.

Sources: International Business Times, BBC News

Source: Hungary: Will The Euro Die The Death Of A Thousand Cuts?