Published November 25, 2011
Credit rating agency Moody's cut Hungary's debt to "junk" grade late on Thursday, dealing a blow to Prime Minister Viktor Orban's unorthodox economic policies and prompting his government to denounce the move as a "financial attack".
Moody's lowered Hungary's sovereign rating by one notch to Ba1, just below investment-grade, with a negative outlook, only hours after rival Standard & Poor's held fire on a flagged downgrade after Budapest said it would seek international aid.
The move followed warnings from all three major ratings agencies that Orban's policies, which have eschewed traditional austerity in favour of revenue-boosting steps like a special bank tax and the nationalisation of $14 billion in private pension assets, could put Hungary's public finances at risk.
It also came after a policy reversal last week in which, after the forint hit a record low, the right-of-centre cabinet rowed back on a 2010 election vow to end talks with the International Monetary Fund to regain "economic sovereignty".
Moody's cited rising uncertainty about Hungary's ability to meet fiscal goals, high debt levels and what it called increasingly constrained medium-term growth prospects as the main reasons behind the downgrade from Baa3.
"Moody's believes that the combined impact of these factors will adversely impact the government's financial strength and erode its shock-absorption capacity," it said in a statement.
"The rating agency's decision to maintain a negative outlook on Hungary's ratings is driven by the uncertainty surrounding the country's ability to withstand potential event risks emanating from the European sovereign debt crisis."
For a text of Moody's statement, see
Hungarian bond yields soared by about a full percentage point, lifting its entire debt curve above 9 percent, while the cost of insuring Hungarian debt against default jumped to near record highs hit in March 2009. The forint fell 1.8 percent to 316.5 to the euro at 0900 GMT, near an all time low.
The Czech crown fell to a 17-month low and the Polish zloty dipped beyond the 4.50 per euro level and briefly approached a 27-month low of 4.537 hit in September.
Nicholas Spiro, managing director of Spiro Sovereign Strategy, said that although most of central and Eastern Europe was better off than southern Europe, fears over the euro zone debt crisis and the Hungarian downgrade indicated turmoil ahead.
"There's no question that sentiment towards the region is deteriorating rapidly and that even the most resilient economies are in for a rough ride in the months ahead," he said.
Orban has cut taxes for families and small firms while raising tariffs on banks, utilities and other big mainly foreign-owned firms, putting the country of 10 million on track to run one of the European Union's only budget surpluses this year.
But the government has failed to spur growth. The European Commission forecasts the economy will expand by only 0.5 percent at most next year, far lower than the 3 percent initially forecast in Orban's medium-term budget plan.
The Economy Ministry said the downgrade was unwarranted and part of a string of "financial attacks against Hungary".
The government cited its commitment to keep the budget deficit below 3 percent of economic output next year, 1 percent of GDP's worth of reserves in the 2012 budget, and an expected decline in debt levels as arguments against the rating cut.
"Obviously, the forint's weakening is not justified by either the performance of the Hungarian economy, or the shape of the budget," the Economy Ministry said in a statement.
"Therefore, it can be driven only by a speculative attack against Hungary, which can be fuelled by exactly these kinds of professionally unfounded assessments by rating agencies."
Moody's said the government's 2.5 percent of GDP budget deficit target for next year may be difficult to meet due to high funding costs and low economic growth.
The IMF and EU extended a 20 billion euro bailout to Hungary at the start of the crisis in 2008 but Orban made clear he wanted no such cooperation under his administration.
His unexpected about-face last week gave pause to other ratings agencies, but Moody's said it illustrated Budapest's funding challenges even if it could alleviate the need to raise credit in the near term.
"Moody's believes that, even with such an arrangement, the government's debt structure will remain vulnerable to shocks in the medium term, which are inconsistent with a Baa3 rating," it said.
Hungary must roll over 4.7 billion euros in external debt next year as it starts repaying part of its 2008 IMF loan.
Budapest has said it wants to use a new IMF/EU deal as a "safety net" against turmoil in the euro zone. It wants insurance funding with no conditionality but market watchers say the Fund will most likely demand policy action and monitoring.
The weak forint pushed Hungary's government debt to 82 percent of economic output by the end of the third quarter, undoing the impact of Orban's $14 billion pension asset grab.
The effective nationalisation of pension assets cut debt by several percentage points but economists and ratings agencies say it has clouded the picture for future government finances.
Moody's said it would further lower Hungary's rating if there was a significant decline in government financial strength due to a lack of progress on structural reforms and implementation of a medium-term plan.
It said it would consider stabilising the ratings outlook if the country were to embark on a sustainable consolidation path, involving a more consistent implementation of the medium-term plan and its euro convergence programme.
The ratings cut came just hours after S&P deferred its decision on a possible downgrade of Hungary to non-investment grade until the end of February, pending talks with the IMF/EU about a new aid package.
Fitch, another rating agency which has Hungary in the lowest investment-grade category, said on Nov. 18 that an agreement on a new IMF programme would be a positive step and could reduce downward pressure on Hungary's sovereign rating.