This could easily turn into an econo-political Fukushima

When it comes to liberty, domestic political orientation, economic progress, and geopolitics, they don’t come any more complicated than Hungary. The immediate danger involves a banking exposure to Ukrainian debt. In the longer term, it represents another potential friction-point between Putin, China, and the West.

Thanks to the naked gerrymandering of the Fidesz government led by Victor Orban, the General Election there in April is something of a foregone conclusion. Although positioned as an anti-liberty right-winger (which he probably is) Orban is really conservative in the sense of being a former communist. The “left” in Hungary, for example, is pro neoliberalism; Fidesz is strongly opposed to that system. Hungary has the strongest relation with Beijing of any mittel-east European country, and probably one of the worst with the EU. Although radically anti USSR as a student leader, Orban himself was a Young Communist regional secretary in his early years….a feature he shares with Mutti Geli in Berlin.

Perhaps not surprisingly then, one of Hungary’s major banks OTP has been lending the troubled pro-Moscow Ukrainian regime shedloads of money. As you might imagine, the Hungarian Government is not best pleased with the Opposition’s ousting of Viktor Yanukovich; they’re also feeling a tad sick about OTP’s exposure to Ukrainian sovereign debt: Morgan Stanley has compared OTP with the two key Russian banks in this telling table:

russhungbanksptnetThe Hungarian lender OTP (right hand column) emerges as having a far higher exposure to Ukraine as a percentage of its equity. And although Putin’s banks significantly declined to comment about non-performing loans, OPT’s at 36% are something of a flashing red light.

In turn, the EU and IMF are large-scale lenders to Hungary, whose national debt also shows signs of being resistant to reduction – it’s currently at 80% of gdp. But the EC’s post crash fiscal programme baldly states, “If the 60% reference for the debt-to-GDP ratio is not respected, the Member State concerned will be put into the excessive deficit procedure (EDP).

The European Commission pointed out last week in its fourth review under post-programme surveillance (related to the EU balance of payments assistance to Hungary) that relative to 2012 Hungary’s structural balance will deteriorate by 1.5% in 2013-2014. But the EC’s new fiscal rules require the structural balance to improve every year.

All this brings with it fears of Hungary receiving Greek-style obligatory EC help, and Viktor Orban isn’t up for that. Being a realist, however, he does know that leaving the EU would give him near-insoluble economic and fiscal problems…hence his aspirations towards arms-length loans from, and trade with, China. As regards Russia, Orban was vociferous in his opposition to dependence on Russian energy while in Opposition, but two months ago he went to Moscow and secured a $14bn loan from Putin to build Hungary’s first nuclear power station.

Once again we can see here the size and complexity of the table stakes, and therefore the obvious geopolitical dimension. But the complication doesn’t stop at political orientation and economics: while described by many westerners as “a nationalist”, Orban is really for a sort of mutualist communism. “We do not want to have any dependence on foreign banks,” said one source there at the weekend, “but equally we think it’s important for our financial institutions to be in local hands”. This is also, of course, anti-globalist. Viktor Orban is no two-dimensional cardboard demon; there are some bits of him one warms to.

It’s a sound idea, but the dark side of this card is that, with foreign banks packing up ready to leave in droves, this makes serious bad debt in Hungarian banks an issue that could turn drama into crisis at record speed. And also, it leaves Orban with limited options. Hence the China dimension.

The simple truth underlying all this is that the former USSR satellites will inevitably make the EU more expensive and less stable, while at the same time raising international tensions from Washington to Beijing via Berlin and Moscow. With guarantees from China, Hungary might well quit the EU, and become a catalyst for stronger opposition elsewhere in the Union…something that is going to be blindingly obvious as a trend after the May European elections. Hungary has a close relationship and alliance with its historical friend Poland…which in turn shares a border with Ukraine.

Yesterday, Polish Prime Minister Donald Tusk said it was essential to prevent Russia’s seizure of Crimea expanding into a wider regional conflict. “We should be able to stop Russia in its aggressive moves precisely in order to avoid a conflict,” Tusk told reporters on Sunday after an extraordinary meeting with party leaders. As a statement, I think that one has lost something in the translation, as it certainly has me confused: if you resist Russia, how can that be done without the danger of conflict?

A financial meltdown a la ClubMed – alongside social strife, a political argument with Brussels, and raised geopolitical sensitivities is, you might think, the last thing the world needs. But on the other hand, the thing that finally got us out of the 1929 debacle was the Second World War. And yes, some people on the planet are mad enough to think that way.

The West in general, and the EC in particular, need to adopt a far more careful, subtle and calm approach to Hungary than the one they went with in Ukraine. There are so many dimensions – and so many consequences that can leak from unexpected places – in this crisis, it’s rapidly turning into an event that might dwarf even Fukushima for significance.

Related: When The Slog looked at Hungary two years ago