Europe's debt crisis returns as fears mount in Hungary

Fears that Europe's sovereign debt crisis is about to claim a new victim prompted fresh nervousness across the EU's stock markets yesterday, with the FTSE 100 Index in London falling by more than 1.5 per cent.

The value of the euro also dropped sharply, to a four-year low against the dollar, after a spokesman for the Prime Minister of Hungary, Viktor Orban, warned that his country's economy was in a "grave situation", in part because his predecessors in government had "lied" about the state of public finances.

The cost of insuring Hungary's debt rose sharply as Mr Orban's spokesman refused to contradict remarks made on Thursday by Lajos Kosa, a senior government colleague, who warned that the chances of the country avoiding a Greek-style crisis were "slim".

The Budapest government's latest assessment of its finances is due to be unveiled this weekend. While the total debt was about 78 per cent of GDP at the end of last year, only marginally above the EU average, there has been widespread scepticism about official figures. The Fidesz Party, elected to government last month, has accused its Socialist predecessor of manipulating the data. Yesterday, Mr Orban's spokesman warned that this year's projected budget deficit of 3.8 per cent of GDP was unrealistic.

Hungary has already been bailed out once since the credit crisis, borrowing $25bn from the International Monetary Fund and the EU two years ago. But economists fear a collapse in the value of its currency (Hungary joined the EU in 2004 but remains outside the eurozone) could lead to a banking crisis, with many homeowners defaulting on mortgages that are often denominated in Swiss francs rather than the local forint.

Lars Christensen, an analyst at Danske Bank, said: "The comments made over the past 24 hours not only increase fears over a possible Hungarian default but also clearly demonstrate that the Hungarian government has very little understanding of how the financial markets actually work."

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