Credit-default swaps on sovereign bonds surged on speculation Europe's debt crisis is worsening after Hungary said it's in a "very grave situation" because a previous government lied about the state of the economy.

The cost of insuring against losses on Hungarian sovereign debt jumped 83.5 basis points to 391.5, according to CMA DataVision prices. Swaps on France, Austria, Belgium and Germany also rose, sending the Markit iTraxx SovX Western Europe Index of contracts on 15 governments 10 basis points higher to 163, and close to the all-time high of 167 on May 6.

Hungary's bonds fell after a spokesman for Prime Minister Viktor Orban said talk of a default is "not an exaggeration" because a previous administration "manipulated" figures. The country was bailed out with a 20 billion-euro ($24 billion) aid package from the European Union and International Monetary Fund in 2008.

"The comments out of Hungary have really spooked the market," said Rajeev Shah, a credit strategist at BNP Paribas SA in London. "Investors are interpreting it as bad sign for trying to tackle Europe's debt crisis."

The euro dropped below $1.21 for the first time since April 2006, stocks tumbled and the cost of insuring against corporate default rose on speculation Hungary will weaken the EU's willingness to rescue the region's indebted nations.

Eoin Treacy's view Hungarian CDS spreads broke above 300 basis points yesterday for the first time since July last year. The spread had pulled back from the early May high, but found support in the region of the 200-day MA and has now posted both a higher reaction low and higher high which is the basis for an uptrend. A sustained move below 230 basis points would be required to question scope for a further deterioration in perceptions of the country's credit quality. (Also see Comment of the Day on May 7th). There remains a high degree of commonality across the East European CDS sector with spreads for Poland, Bulgaria and. Slovakia also pushing higher though perhaps not to the same extent.

The Hungarian stock market tested the psychological 20,000 level today and bounced but needs to sustain a move above 23,000 to question scope for some further lower to lateral ranging.

The Polish Index found support near the 200-day MA three weeks ago but needs to sustain a move above 42,000 to break the short-term progression of lower rally highs and question scope for some further lower to lateral ranging.

Turkey has so far been immune from the travails of its EU neighbours and its stock market reaction has been limited to an equal sized reaction. A break of the progression of rising reaction lows currently near 53000 would signal a major trend inconsistency and potentially top formation development