Euro falls below $1.20 for first time in four years over Hungary debt crisis
THE euro fell below $1.20 for the first time in more than four years yesterday, after suggestions that Hungary's budget deficit is worse than official statistics showed, and lacklustre growth figures from the eurozone economy.
Although Hungary is not a member of the euro, comments from a spokesman for the newly-elected prime minister that the economy "is in a very grave situation," sparked worries about the government debt crisis spreading to eastern Europe.
Peter Szijjarto, spokesman for Hungary's prime minister Viktor Orban, said he did not think "it's an exaggeration at all" to talk about a default.
Mr Orban took office just last week after winning elections with pledges to cut taxes and stimulate the economy. But he failed on Thursday to get European Union approval to widen the budget deficit and it is clear that the election promises cannot be delivered.
The previous government, which pledged to narrow the budget gap to 3.8pc of gross domestic product (GDP) this year, "manipulated" figures and "lied" about the state of the economy, Mr Szijjarto said.
Amid suggestions that the true government deficit could be 7pc of GDP, Mr Szijjarto said a fact-finding panel appointed by the new government will probably present preliminary figures on the state of the economy this weekend. The government will prepare an action plan within 72 hours after the report, Mr Szijjarto said. "The moment of truth has already arrived in Greece and it has yet to come to Hungary." The Greek crisis was triggered when the incoming socialist government said the budget deficit was much worse than reported.
Traders said comments from the French prime minister Francois Fillon, who said he was relaxed about the euro's fall against the US dollar, also hurt the euro. The single currency dropped as low as $1.1993, its lowest point since March 29 2006, before recovering to $1.20.
The fall came despite weaker than expected jobs figures from the US, which sent share prices lower. Earlier, figures showed that the eurozone economy posted growth of 0.2pc in the first quarter of 2010 compared with the previous three-month period but well short of US and Japanese growth rates and showing few signs of underlying strength.
"The breakdown shows that almost all growth came from a build-up of stocks. Net exports, household spending and corporate capital spending all subtracted from growth. This is a bad harbinger for the rest of 2010. Another euro area recession, while by no means certain, has become a distinct possibility," said Gabriel Stein of Lombard Street Research in London.
Compared with the first quarter of 2009, eurozone GDP showed an increase of just 0.6pc, although this was revised up from earlier figures.
(Additional reporting by Bloomberg)