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Hungary's flag carrier Malev failed in its bid to overcome a chronic cash shortage and ceased operating on February 3, after a loss of confidence which spiraled downwards swiftly following a move by the government on January 30 to protect it from creditors. Analysts fret the airline's failure could have big knock-on effects for the country's economy, including a possible doubling of the projected budget deficit for the year.

Despite the extraordinary protection from bankruptcy extended by the government in a bid to allow Malev to continue flying until new capital could be found, the airline's fleet was grounded at 6:00am CET on February 3 after two of its planes were seized by creditors in Israel and Ireland.

Malev says its suppliers had lost confidence and started to demand advance payment for their services, while the government could no longer provide cash injections for the company following an EU ruling in January. "This has accelerated the outflow of cash to such an extent, that by today the situation of the airline has become unsustainable," Malev said in a statement. "The board, in order to minimise losses, has ordered a halt in operation of the Hungarian national airline."

Prime Minister Viktor Orban told Kossuth radio following the announcement that the decision to ground Malev was made after two aircraft were prevented from taking off from Israel and Ireland due to the company's debts. However, the PM continues to insist that Hungary must have a national airline, despite the fact that several such airlines across Europe are struggling and searching for investors. "It is painful... We tried to keep Malev operational as long as possible, but we could no longer do it, as we would have lost our aircrafts seized abroad ... We had to stop," Orban said, according to Reuters. "But I think restarting (the airline) is not impossible, and if we can get rid of the burdens inherited from the past, there could still be a Hungarian national airline."

Receivership

Malev had a receiver appointed by the government on February 2, the country's development ministry announced. "In financial matters, from tomorrow we have to coordinate all steps with the receiver," Malev chairman Laszlo Berenyi said, reports AFP.

The development ministry confirmed this with its own statement, according to Reuters. "Approval of the receiver will depend on whether the payment is necessary for the airline to perform its main function and continue business in an orderly manner," it said in a statement. "Creditor demands are suspended and the different guarantees for non-payment of bills can no longer be applied."

The statement added: "Counterparties cannot void or walk away from prior agreements entered into with Malev. The validity of the airline's official licences are automatically extended." All of which would be fine of course if Malev's business model wasn't all about sending expensive aeroplanes into other legal jurisdictions.

It was notable that the government also set up a HUF2bn (€6.8m) fund to compensate passengers should bankruptcy occur before a solution could be found. Given that Hungary has been trying to privatise the carrier for over a decade, the chances of finding a saviour in a handful of days always looked to be a fantasy.

However, analysts at Equilor suggest that looking after the passengers is the least of its worries, and that unless the government can find a solution soon, it could face a bill as high as €1.8bn. That's because the 2006 privatization contract of Budapest Airport - now held by Germany's Hochtief - obligates the state to compensate any major loss of traffic at the airport. Malev reportedly drives around 40% of that traffic. "If the current situation [persists]," Equilor suggests, "it is likely Hochtief would file a complaint against the Hungarian government, resulting in a payment obligation of €1.8bn."

That, they add, could double the projected budget deficit for the year, as well as throwing another spanner in the works in continuing talks with the EU and International Monetary Fund over a loan programme - all of which threatens to push the recent market recovery of Hungarian assets off the rails.