Hungary and Greece: What is the best strategy, that of the bad pupil (Hungary) or that of the star pupil (Greece)?

- "Greece is rapidly reducing its fiscal deficit, both via a cut in government expenditure and a tax hike, reforming its pension system and accepting a decline in activity and employment. As a result, it is receiving substantial international financing."
- "Conversely, the new Hungarian government prefers to maintain an unchanged fiscal deficit and tax financial institutions, but has decided to reduce household taxes to boost consumption and tax on earnings to boost competitiveness. However, it does not meet the conditions for receiving help from the IMF."
- "In the case of Greece (the star pupil), the major risk is the size of the shortfall in activity, which may be such that it will jeopardise the recovery in public finances in the future."
- "In the case of Hungary (the bad pupil), the major risk is financial market distrust, which would weaken the currency (the forint), while most of the debt is denominated in foreign currencies."
- "What is the most serious risk, and what is the market perception? Currently, the financial markets clearly prefer Hungary’s strategy to that of Greece. However, both countries have to stabilise their domestic savings at a higher level, which requires a reduction in the fiscal deficit."
- "Nevertheless, Hungary risks an exogenous shock in the event of a rise in risk aversion and a weakening of the forint. It is therefore under the threat of an uncontrollable event."

Natixis Flash Economics 443 20100909

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