The shape of things to come, if…

Punishment in the case of slightest discredibility is fast

Stand-by agreement between Hungary and the IMF was put together in November 2008, much like the one for Latvia which was negotiated in December 2008. On 17 July 2010 negotiations between the IMF-EU and the Hungarian authorities were suspended due to disagreements on further austerity measures and the ensuing fallout was entirely predictable.

The new Hungarian government has had an awkward preference for putting its foot in its mouth (I mean, who really wants to compare oneself with Greece? – but the Hungarians did) and here comes the price:
1 – The forint has depreciated against the euro – i.e. further pain to those who borrowed in foreign currency.
2 – The government has problems selling even short bonds (3-month bills) to finance the budget deficit.
3 – And of course interest rates for these have gone up.
4 – And in the CDS market Hungary is even ahead (slightly) of Latvia.

As I mentioned, entirely and utterly predictable. When financial markets sense a lack of credibility in government economic policy, punishment begins.

The lessons for Latvia should be glaringly obvious.

Morten Hansen is Head of Economics department at Stockholm School of Economics in Riga.