Believe it or not—Hungary is the focus of market fears from Europe today.
Hungarian sovereign debt is on the verge of being downgraded to “junk” status, and this morning the government refused to issue debt after an undersold bond auction.
Add to that the fact that the Hungarian forint hit its lowest value against the euro today since March 2009.
And you can kiss your dreams of a bailout goodbye. Hungary already got a bailout from the International Monetary Fund back in 2008 to avoid default, but refused a second payout in order to go it alone on economic reforms.
But the big reason you have to care about Hungary is not because its economy is so ugly, but because of its ties to Austria.
Austrian banks have a total $226 billion in exposure to formerly Soviet eastern Europe, according to the Bank of International Settlements (via Bloomberg), and total assets of €1.14 trillion ($1.6 trillion) at the end of June. The majority of those assets were issued in Hungary, the Czech Republic, and Romania.
So problems in Hungary could lead to trouble in Austria if banks have to write down more debts on top of those they’re already writing down from the PIIGS. Standard & Poors Ratings Service said last week that the Austrian government may not be able to prop up its banks’ eastern European lending operations if they require money like they did in 2009 and 2010.
These fears contributed to rising Austrian bond yields last week. The fact that Austrian banks and the Austrian economy are still relatively strong has partly mitigated those concerns—at least, for now.
Austria is home to the euro area’s seventh-largest economy, and an important AAA-rated contributor to the euro rescue fund. If its debt were to be downgraded because of worsening banking sector conditions, this would be a huge blow for measures to stem the debt crisis.