HUNGARY: IT'S THE ECONOMY STUPID

The forint has slid to record lows; two rating agencies have downgraded Hungary's public debt to junk; bond yields have topped 10%. Unemployment is nudging 11% and the labour force participation rate is among the lowest in Europe. Hungary has about € 4.6 billion of foreign debt maturing this year and probably sufficient resources to get through to the third quarter. But it's financing costs have risen to unsustainable levels and the forint suffered a sell-off as conditions in the eurozone, its main export market, deteriorated and growth prospects dimmed. It has suffered too, from deleveraging by foreign banks that dominate its banking system, severely constraining credit.

The government has kept its official 2012 growth forecast at 0.5%, but many market economists forecast a recession with the Hungarian economy contracting by 2% this year.

Without a backstop from international lenders, uncertainty could drive the forint still lower forcing the central bank to put up interest rates, and damaging growth further.

The centre-right populist government has effectively nationalised billions of private pension assets, levied windfall taxes on sectors dominated by multinational companies, curbed the jurisdiction of the Constitutional Court, adopted a controversial new constitution, and placed its allies in key posts such as the state audit office, the media regulator and the fiscal council.

On the political side, let us recall that Fidesz the centre-right political party got elected in a free and fair election with 53% of the vote which translated into 68% of the seats in the parliament under Hungary's current disproprtionate election law. With this super majority, Fidesz won the power to change the constitution and a wholly new constitution took effect on 1 January 2012. But the economic crisis facing Hungary overshadows the government's policies and opposition protests. Fidesz won in 2010 promising to create a million jobs. But its attempt to generate growth has so far ended in failure. As the public mood worsens so do the country's ratings, and the chance of attracting investment and creating more jobs.

As for the authoritarian style of the government, let us not exaggerate: Opposition politicians are not imprisoned or beaten up. The non-state media are scathing about the government. Borders remain open. And tens of thousands of protesters were able to gather freely on 2 January in a peaceful demonstration in Budapest against the country's new constitution. Hungary's downfall is first and foremost economics