Financial & currency crisis in the country of Hungary

Thomas Svarre Refdahl & Kasper Karstensen

Student thesis: Master thesis


Our contention, as stated in this thesis, is that by the use of preeminent elements of the three generation of currency crisis models, put into the framework of the Minsky-Kindleberger and Kondratieff cycles, Hungary has recently experienced both a financial and a currency crisis. Through the lead up to crisis section two primary factors are highlighted as the primary reasons for the worsening of the Hungarian economy as the global financial crisis engulfed Europe; 1) the abandonment of the fixed exchange rate regime in February 2008, and 2) with significant increases in loan taking during the past decade in Hungary, forint denominate loans fell as foreign denominated loans increased, primarily being in Swiss francs. During the intensive crisis period the weakening HUF combined with a decline in house price of 10%-30% in the spring of 2009 is brought to light as key factors in the ongoing Hungarian turmoil. In addition the foreign denominated debt level of 125% of GDP is emphasized, additionally Hungarian investors started to default on their loans, primarily in Swiss francs, expressed in the rising nonperforming loan figures. In relation to Hungary‘s stance compared to its emerging market neighbors in the CE3, it is evident that the country stands out in many key economic spheres as highlighted in Hungary in a regional context. Accentuated is the interdependence to Euroland and the fact that Hungary takes the lead in the entire CEE region with a loan-to-deposit ratio of 140%. This is in line with the excessive loan taking that was concluded during both the lead up to crisis and intensive crisis period sections. As for the theoretical application to Hungary section it is concluded that both the Minsky-Kindleberger framework and the three generation of currency crisis models can deduce a recent crisis in Hungary. However the models on both financial and currency crisis theory cannot be confirmed satisfying in explaining the Hungarian turmoil to the fullest, due to unspecific outlines of the use of these models. For this specific reason the section of adjusted crisis theory on Hungary seeks to put together the best elements of the three generation of currency crisis models with the interpretive stages of the Minsky-Kindleberger framework. This is all put into context of the Kondratieff cycle and results in the Emerging Market Crisis Model. While not flawless, the EM Crisis Model succeeds in concluding that Hungary has recently experienced both a financial and currency crisis. Lastly the final chapter where are we heading emphasizes a general negative scenario in Hungary in the long run, substantiated in the authors overall global view, accentuated in the fact that borrowed stimulus is currently running the world economy and that this cannot be sustainable in the long run. Disobeying economic principles of free market power and emphasizing a business model that practically invests in itself, the authors are predominantly negative towards a quick global and Hungarian economic recovery.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2009
Number of pages141