Hungary is expected to turn to some form of default to overcome its current debt problems, according to Capital Economics.
The alternative is further austerity, but the problem is that the public will not be ready for the additional cuts that would be needed to bring debt down to a sustainable level.
Growth and inflation are not viable options for Hungary, says Capital Economics.
Much of its debt is in foreign currencies cannot be inflated away while growth prospects are closely tied to those of the ailing eurozone. So, in order to avoid default, the government has to pin its hopes on austerity.
To bring external debt down to a sustainable level, Capital Economics estimates that Hungary needs to run a current account surplus of 3.5 percent of GDP over the next five years. Given the weakness of Hungary's key trading partners, this will have to come via lower imports with a counterpart in very weak domestic demand.
However, Hungary has already been going through austerity since 2007 and it remains to be seen whether the public will put up with a further five years, adds Capital Economics. So it is more likely that policymakers will seek alternatives.
Growing discontent with austerity makes default more likely, points out Capital Economics. While there are many costs to default, it does hold some attractions since most of Hungary's debt is held by external creditors.
The spread of debt between both the public and private sector makes the government less able to impose default, says Capital Economics. Private sector debt is the biggest concern and is likely to be the focus of any such move.
It's difficult to be precise about the scale of the losses for banks, but it is estimated by Capital Economics that local banks may face recapitalisation costs of around 4 billion euros ($5.2 billion). As well as keeping local credit conditions extremely tight, default would be inevitably triggering a sell-off in the Hungarian bond and currency markets.