Is Hungary Suffering From Debt Deflation?

For the experts at BCA Research, the answer is yes...debt deflation plagues Hungary.

According to the US Global Investors,

``Bank Credit Analyst research highlights that Hungary has been in a classic debt deflation, as its nominal GDP has been contracting while government borrowing costs have held above 6 percent. Hungary’s domestic demand has been contracting for three years and the current government is planning to reflate via massive interest rate cuts, fiscal spending, and a weaker currency."

However, we see Hungary's condition in a different light, if not the opposite circumstance.

While it is true that Hungary has been in a deep recession, as manifested by the steep decline in GDP as measured in both annual and quarterly changes, (chart courtesy of tradingeconomics.com), inflation as measured by price changes in consumer price index has been in positive zone and rising!

And it is not just in Hungary, but positive inflation is true for most of Europe, as shown in the above chart courtesy of Financial Times Blog on Money Supply, as of March. The only exception is in the Baltic states (but this has already reversed based on updated statistics).

The following is an updated chart on Hungary courtesy of tradingeconomics.com.

Fundamentally, we see the same dynamics unfolding; while Hungary's recession has been accompanied by RISING joblessness (upper window), inflation has also been RISING (lower window)!

And Hungary's currency has been falling against both the US dollar (upper window) and the Euro (lower window).

The next chart courtesy of yahoo finance.

This is in sharp contrast to the peak of the crisis in 2008, where the forint surged against both major currencies!

Then, the rising forint was symptomatic of debt deflation. Now it seems an entirely different story.

To add, while Hungary's equity bellwether the Budapest Stock Exchange fell by 3% this week on an apparent "gaffe" by the newly sworn administration, on a year to date basis, the Budapest index is still marginally up (by about 2%), and is still about 100% up or double compared to the March 2009 lows.

So all these hardly resembles a Fisherian debt deflation environment. Low bond yields in a recession doesn't automatically account for debt deflation.

Besides, Hungary has managed to turn her streak of current account deficits into surpluses.

So this should hardly make Hungary's conditions parallel to Greece's predicament. Yet Greece, like Hungary, hasn't also been suffering from debt deflation but from 'stagflation' as we have previously shown.

In November 2008, the hard hit crisis stricken Hungary received $20 billion in rescue money from the IMF, EU and the World Bank.

Meanwhile, IMF officials are set to meet with Hungarian officials early next week. The country still has an open credit line of about $2 billion dollars, according to the AP.

Bottomline: Hungary's conditions doesn't seem anywhere like debt deflation or resembles little of Greece's debt crisis. However, unless present trends make a volte-face, both Hungary and Greece appear to be in a mild stagflation.