Is Hungary the Financial Crisis' Next Iceland?

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Bela Szandelszky/AP

Hungarian Prime Minister Ferenc Gyurcsany speaks in Parliament while officially announcing his resignation to Members of Parliament in Budapest

A rumor briefly circulated Hungary a few weeks ago: things were so bad, it went, that the government intends to freeze bank accounts. The government repeatedly assured Hungarians that the rumor was groundless. But so deep is the current economic malaise gripping the country that thousands of people were taken in.

Little wonder. Even before the financial crisis hit last year, Hungary had one of the largest budget deficits in the E.U. Since last September, things have grown progressively worse. Not only has Hungary needed the life support of a US $25.1 billion credit line from the International Monetary Fund, its currency has been in free fall. Since the beginning of this year, the Hungarian Forint has slid 19% against the U.S. dollar, and 13% against the Euro. The government now predicts the economy could shrink by 3% this year, a modest estimate compared to the 7.5% drop predicted by some analysts. (See pictures of the global financial crisis.)

That mounting pressure pushed Prime Minister Ferenc Gyurcsany to announce Saturday that he would step down. At first, friends and enemies alike wondered if it was a trick by the wily politician to bolster the besieged government. But on Monday Gyurcsany said his resignation was permanent. "I hear that I am the obstacle to the cooperation required for changes," he reportedly stated at a congress of his Socialist party (MSzP) over the weekend. "If so, then I am eliminating this obstacle now."

Gyurcsany's departure closes the book on an administration troubled from the day it was elected in April 2006. Just a few months after that poll, anti-government protesters in Budapest attacked the Hungarian state TV building, clashed with police, and set fire to vehicles during several nights of violent riots. The riots were sparked by the government's unpopular reform program, which aimed to tackle everything from healthcare and pensions to the size of the state bureaucracy. (See pictures of riots.)

At one point, analysts declared the reform process dead. But before his resignation, Prime Minister Gyurcsany proposed a new package in response to the financial crisis. Again, critics dismissed this plan as too little too late. Krisztian Szabados of the Budapest-based think tank Political Capital called it "weak" for not going "far enough" in cutting spending and taxes.

Now a new government must try to rescue the economy. Former-national bank governor Gyorgy Suranyi and academic Ferenc Glatz have both been mentioned as possible caretaker premiers. Or the country might decide to go to the polls early which would open the way for the rightwing Alliance of Young Democrats (Fidesz) party to gain power. Though Fidesz leaders are publicly calling for an early vote, they may prefer to wait until next year. "Fidesz's rhetoric is that they desperately want elections, but they are afraid of the job," says Political Capital's Szabados. "If they win early elections, they will have to face the financial crisis and find solutions." (See pictures of the Top 10 scared traders.)

So far, Fidesz has been vague about the reforms it would implement, creating the belief among many supporters that it can reform the economy without the painful reforms and austerity measures analysts say are desperately needed. "The big question is whether the public is prepared for reform from a credible new Prime Minister," says Szabados, "or a Prime Minister who still believes in managing the crisis without pain?" (See TIME's pictures of the week.)

The winner in the current standoff, if there is one, may be the departing Gyurcsany, who retains a measure of power after orchestrating his re-election as MSzP party chairman over the weekend. He may be the most unpopular man in Hungary right now but Gyurcsany's opponents may regret his departure.

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