January 6, 2012: Hungary is proof that Europe's debt crisis is not limited to eurozone countries like Greece and Italy. Hungary faces challenges as it needs to refinance about one billion dollars in government debt by May or run out of money. The amount needed for refinancing is a challenge for a country of only ten million people.

The interest Hungary has to pay to get people to buy its government bonds hit ten percent today after Fitch Ratings became the third rating agency in two months to give Hungarian bonds a junk rating. The rating means that the bonds are considered worthless and will likely never be repaid. Hungary's debt problems have caused the value of the national currency, the Forint, to drop to its lowest level ever against the euro.

The drop in the value of the Forint has hurt private borrowers who took out home loans denominated in Swiss francs or euros at low interest rates. Since the loans have to be repaid in the foreign currency, the cost of exchanging the Forint to make monthly payments has doubled for some borrowers. Currently as estimated 14 percent of Hungary's total private retail debt is in default. (Poland also faces a similar problem as Polish consumers also took advantage of low interest loans denominated in euros and Swiss francs.)

If the Hungarian government were to default on its obligations, it could wreak havoc on the Austrian banking system, which has an estimated $226 billion in exposure to Eastern Europe and $1.6 trillion in assets held in the region. Two days ago the interest rate on 10-year Austrian government bonds – an indicator of stress on the country – rose to 3.20 percent, the highest level since the Austrian central bank intervened on the market earlier in the year to prevent rates from rising further. Austria's exposure to Hungary's debt could eventually affect its own credit rating.

The cheap Forint provides an interesting counterargument to the notion that an inevitable devaluation of a national currency upon its reintroduction if a country were to leave the eurozone would provide a financial blessing. In theory the cheaper Forint means that Hungarian exports are more attractive to foreign buyers.

On the other hand, the cost of imported oil has soared, along with the cost of imported raw materials needed to produce some Hungarian exports. Multinational companies like Daimler have no problem with that, but local Hungarian manufacturers have been hurt by additional fuel and materials costs. Hungary's experience with its weaker Forint might be a valuable lesson for Greece, which some see as flirting with a departure from the eurozone.

As part of the admimission process for its EU membership in 2004, Hungary is committed to introducing the euro. In terms of its debt problems, Hungary is already on a par with several eurozone members.