When it comes to debt problems, the first words that come into mind are "euro" and "zone." But lately, there's this one country that is threatening to take the spotlight away from the euro zone. I'm talking about Hungary.
Hungary is currently in the middle of a very big insolvency problem as its authoritarian leader Prime Minister Viktor Orban refuses to strike a deal with the International Monetary Fund (NYSE:IMF). As a result, bond yields of the nation are soaring, and lenders are extremely hesitant in providing credit. Money is scarce.
If this continues, Hungary may end up being the first major country to call it quits and declare bankruptcy. This could lead to deadly debt contagion wherein huge write-downs occur not only in the European Union (NYSEARCA:EU), but the global banking system as well.
When you think about it, Hungary isn't exactly what you'd call a "large" country. In fact, its population is barely 10 million and its GDP is just 200 billion USD, barely matching Microsoft's 213 billion USD market capitalization. It is not rich, nor is it big, but events in Hungary foreshadow gloomy things to come.
What is happening to Europe is similar to a gas tank left open. The gas being released to the air is slow and not immediately lethal, but one small spark would lead to a huge dangerous explosion. Hungary is a lot like that spark - not rich, not huge, but extremely deadly.
For one thing, their debt troubles are rooted much deeper than meets the eye. In fact, their financial woes started nearly half a decade ago, when the credit bubble burst and plunged their country in recession back in 2008.
Almost four years have passed and Hungary has yet to recover from this debt mess. The fact that their foreign debt has been growing hasn't made the situation any easier. With that, credit rating agencies slapped several downgrades on their sovereign debt, dragging it down to junk bond status. As a result, bond yields spiked to 10%, making it more difficult for their government to secure funds.
Recall that the EU and the IMF already reached out to Hungary back in 2010 and offered a loan package worth 20 million EUR. However, Hungary refused to swallow its pride and decided to fly solo, insisting that it could face their problems on its own.
Fast forward a year later and a million more euros deeper in debt, Hungarian Prime Minister Orban is still adamant that Hungary doesn't need the IMF's help. For him, sovereign default isn't such a bad option since it would only mean losses for investors. Yielding to the IMF, on the other hand, would be an admission of failure and would mean the loss of his political credibility.
Although the IMF's proposed bailout package gives hope that economic and financial stability could be restored in Hungary, Orban seems intent on preventing an agreement from happening. It remains to be seen whether his unorthodox economic policies could keep Hungary on its feet, but tragic consequences await unless he's able to do so.