Hungary On The Brink Of Bankruptcy

The birthplace of the Rubik's Cube has provided its government with a multi-sided financial crisis that defies any resourceful solution.

The forint currency has plummeted and unemployment has ballooned, creating a voracious debt trap that is sucking down banks backed by Western taxpayers, particularly those of Switzerland and Austria.

For almost a decade Hungary binged on cheap foreign loans taken out in Swiss francs and euros. It was a regional trendsetter. Foreign banks targeted the newly liberated central and eastern European states hoping to expand rapidly in new markets.

When forint interest rates proved stubbornly high, lower rate loans in Swiss francs and Euros offered extra purchasing power. Statistics show that more that 60 per cent of Hungarian mortgages and car loans are denominated in foreign currencies. In one retrospectively frenzied month - October 2007 - foreign currency loans represented 93 per cent of all lending.

Hundreds of debtors in default have turned to a volunteer organization, the Association of Bank Loan Victims, for advice on saving their homes from repossession.

It is not just individuals that are prey to the downturn. Hungary is experiencing its gravest crisis since 1946 when it suffered history's worst bout of hyper-inflation. Today's battered forint was introduced then to replace the pengo, which was destroyed after the government tried to wipe out a Second World War debt overhang.

Within the Soviet bloc, however, Hungary was one of the most prosperous states. It's government kept trade links open to the West, which in turn hoped to use its open borders as a platform to undermine ComEcon, the Communist common market.

After the fall of the Berlin wall, Hungary was a poster child for foreign investment, particularly in the realms of car manufacturing and property. After a run on the currency last year, the property market collapsed. A double whammy in the form of a collapse in Western European demand for manufactured goods - most notably cars - means Hungary has seen no advantage from the devaluation. Unemployment has soared - 100,000 people are expected to lose their jobs this year.

The Hungarian government is attempting to guarantee the mortgage payments of everyone who loses a job in the crisis but it is already in receipt of IMF assistance and the pledge will mean more cuts in general expediture. International help has been sought. Switzerland has promised to provide all the Swiss francs the Hungarian government needs to meet repayment demands. Austria is demanding the EU to establish a 150 billion euro (£134 billion) fund to bail out East and Central Europe.

The highly unpopular prime minister, Ferenc Gyurcsany, hit out at bankers that enjoyed the profits of lucrative cross-border transactions without ensuring customers were fully prepared for the risks of an economy turning sour.