Hungary economic fears hurt markets

World financial markets are dipping on fears that Hungary might be the next Greece and could have to default on its obligations.

Default worries grow, tax cuts still promised

Hungary may be the next Greece, participants in financial markets fear.

Their concern was boosted Friday when a spokesman for Hungarian Prime Minister Viktor Orban said the economy is in a "grave" situation, and the previous government had understated the deficit.

"I don't think it's an exaggeration at all" to suggest that the country may default on its obligations, spokesman Peter Szijjarto said, according to media reports.

This reinforced previous indications that Orban's new government, which was elected in April but took power only at the end of May, is struggling with the public finances.

Szijjarto's statement contributed to a fall in stock markets Friday, and also pushed the Hungarian currency, the forint, down against the euro and dollar.

"I'm staggered by these comments," Royal Bank of Scotland analyst Tim Ash told Bloomberg, noting that they undermine the forint and the confidence of bondholders in Hungary.

But former finance minister Peter Oszko told Bloomberg that Hungary is "in no way near default." He said the new centre-right government, which supplanted the previous socialist administration, is playing alarmist politics.

'Far-reaching structural reforms' urged

The European Commission, however, has recognized problems with Hungary's finances. President Manuel Barroso, who met Orban on Thursday, said Hungary needs "far-reaching structural reforms" to "lay the foundations for an economic rebirth and modernization."

The International Monetary Fund provided an aid package to Hungary of up to $25.1 billion US in 2008 to ease investor fears about the country's ability to meet debt payments.

In its most recent report on Hungary, the IMF said in March that the country needs strict spending controls to get its government deficit to under three per cent of gross domestic product.

Szijjarto said the new government will publish a report on the economy, perhaps as soon as the weekend, and will follow up with a plan within three days.

And despite his comment about the possibility of a bond default, he said Orban's government will go ahead with a campaign promise to cut taxes.

With files from The Associated Press