The European Union and the International Monetary Funds are playing a "game of chicken" [game theory situation where adversaries in a game do not want to give in, but if both do not, disaster will result] with the right of center governments in Hungary. If both sides persist in the collision course then both sides will be burned.
Hungary needs a credit line from the EU and the IMF to roll over some of its debt. This does not reflect poor financial management in Hungary, which has improved since 2008. It is the general conditions in the jittery European credit markets that are making European debt unattractive, as France learned this week.
The EU and IMF broke off talks with Hungary after the supermajority that Prime Minister Viktor Orban commands in Parliament passed a new central bank law that undermines the bank's independence by allowing political appointees.
The IMF and EU wants the law rescinded, while Orban claims that this law and the entire recent spate of legislation is designed to rid Hungary of the communist legacy that it inherited.
Given the impasse, the Hungarian currency, the Forint, has taken a battering, while the yield on Hungarian 12 months treasury bills has shot up to nearly 10% which is 2% higher than the last auction on December 22.
The issue is not only financial. The Hungarian opposition, which mounted a major demonstration to coincide with the new constitution coming into effect, claims that the majority is trying to eliminate the minority.
Within the European Union some of the parliamentary groupings including the Greens and Liberals are calling for the suspension of Hungary's voting rights, claiming that Hungary is not respecting "human dignity, freedom, democracy, equality and the rule of law and respect for human rights."
Orban had originally displayed a blase attitude about the crisis claiming that it was a malady that was striking all of Europe. Now Hungary's chief negotiator Tamas Fellegi is sounding a slightly different tune. Hungary, he said, needs an agreement with the EU and the IMF in order to finance its debt at a manageable interest.
The EU also has an interest in restoring talks. The Austro-Hungarian Empire died at the end of World War I, but Austria is heavily invested in Eastern Europe, including Hungary. If Hungarian finances deteriorate,Austrian finances will take a hit. This is already being reflected in the market for Austrian bonds, whose interest rates are rising.
In the broader sense, since the EU struggled so mightily to prevent Greece from defaulting, fearing that it would create financial panic and negative repercussions, it cannot countenance a Magyar default with greater equanimity than a Hellenic one.