Don’t panic! Europe is not falling apart

Dear Europe: Please stop it with the default threats, budget deficit projection scares and high debt-to-GDP ratio fears. That goes for everyone else too. I can’t take it anymore.

Yours truly,
Bryan

I don’t know about you, but it’s hard to wake up every morning and hear about another country needing a bailout and then seeing the markets nosedive. This time it’s Hungary. On Friday the country’s recently elected government warned that, if they can’t get their growing debt under control, the country could be headed for a Greece-style meltdown. Needless to say, indices around the world plummeted — the Dow fell 324 points, the S&P/TSX dropped by 235 points — and once again investors panicked.

I’m not sure how many times this will happen until people take a deep breath before exiting markets, but it’s probably a good idea to remain calm the next time a European country is in trouble. According to UBS Wealth Management Research Hungary is not the new Greece. While it has a debt-to-GDP ratio of 80%, one of the highest debt levels in the region, the financial firm says that’s much lower than Greece. It’s also lower then Japan, the UK and the U.S.

UBS says the government’s warning has more to do with politics than a crumbling economy, though Hungary did need a 20 billion Euro bailout package in 2008 to avoid a default.

“It appears that the Fidesz party, elected in April 2010, is doing what most newly elected governments do: trying to get as much room for fiscal maneuvering as possible by raising the outgoing government’s deficit projections,” writes UBS analysts Kilian Reber and Michael Bolliger in a report. “Fidesz was partly elected on promises to lower taxes and stimulate growth, which means that the budget deficit would have to raised and the IMF/EU financial support package renegotiated.”

This, says UBS, is not new news. Hungary has been in talks with the IMF to raise deficit targets for some time. The analysts say Hungary’s current officials were trying to “gauge the fiscal maneuvering potential, but may have gone a bit too far in their rhetoric.”

If you still think Hungary is Greece, Danske Bank released a report titled “Hungary is Hungary” — so keep Greece out of it. Their paper points out that Hungary’s budget deficit is much lower than Greece’s, the country does need any extra funding and Hungary is in a current account surplus while Greece faces a current account deficit.

Some people have said the government’s recent economic statements have more to do with them wanting to back away from their election promise to lower taxes than anything else. The authors of Danske Bank’s report take a different view, saying bluntly that it was “not part of a well thought-out political strategy for domestic political consumption. Neither were similarly ill-advised comments from government spokesman Peter Szijjarto. Rather we see these statements as the natural continuation of a very hostile election campaign.”

What does this all mean? Before investors panic, and potentially lose money, they should do their research and find out what’s really going on. And, while Europe’s got problems, it is not disintegrating before our eyes. Finally, for investors who haven’t been turned off yet, it may be time to buy.
Follow Bryan on Twitter @bborzyko