It's time to get seriously worried about Hungary. Thursday's debt auction was a disaster. The country was obliged to pay 9.96% for short-term debt and didn't even raise the 45bn forints it was seeking via auction; it got just 35bn, presumably because it turned away bids pitched at 10% or more.

The backdrop is well known. The Hungarian currency is in freefall (down 18% against the euro in six months) despite rate hikes designed to shore up confidence and protect mortgage borrowers who have (ridiculously) taken out loans in foreign currencies. The government needs to raise about $16bn this year and Hungary's banks require foreign lines of credit. Protesters are on the street, raging against a new constitution that it widely criticised as anti-democratic. Prime minister Viktor Orbán's regime is at loggerheads with the European Union and the International Monetary Fund over a new law that limits the central bank's independence.

The only mildly encouraging news is that this auction disaster prompted a few conciliatory official noises towards the IMF. But there's clearly a very long way to travel before the IMF could be sufficiently reassured about the central bank's role to offer a financial backstop. Get set for more emergency rate rises to try to halt the flight of capital. The risk of a Hungarian banking crisis and credit freeze is high.

It's yet another reason to worry about the health of the European banking system. Eight of the top 20 lenders in Hungary are owned by Europeans, as the table below from National Australia Bank shows. The exposures are not huge as a percentage of the parent's total assets – but, nor, in several cases are they insignificant.

Eight of Hungary's top banks are European-owned. Source: National Australia Bank

The combination of the Hungarian crisis and the mammoth rights issue from Italian banking giant Unicredit has put the skids under the euro.

The euro has lost ground to the US dollar over the last six months. Source: Google

The single currency, remarkably, spent most of last year meandering within a fairly tight range against the US dollar (which may say a lot about how poorly investors regard the financial health of the US) but in the ugly race, the spotlight is now firmly on the euro.