Moody’s said late Thursday that it was cutting Hungary to a speculative rating of Ba1 from Baa3, its lowest investment grade, and was maintaining a negative outlook on the debt. The agency cited its doubts about whether the government of Prime Minister Viktor Orban would be able “to meet its targets on fiscal consolidation and public-sector debt reduction over the medium term, in view of higher funding costs and the low-growth environment.”
The benchmark Budapest stock index fell 3 percent, while the currency, the forint, and Hungarian bond prices sagged.
While Hungarian bonds had been trading at levels suggesting investors already treated the debt as junk, Mr. Orban had said Nov. 18 that Hungary would seek “an insurance-type agreement” from the I.M.F. in a last-ditch effort to keep its investment grade.
The Economy Ministry, in a statement cited by Reuters, called the ratings agency’s move the latest in a string of “financial attacks against Hungary.”
The Hungarian downgrade was just one of several to European Union countries. On Friday, Standard Poor’s cut its rating for Belgium to AA from AA+, still investment grade, but said the outlook was negative. And Fitch Ratings on Thursday cut its rating on Portugal to junk, citing similar concerns about the trajectory of government finances.
The biggest ratings question hanging over Europe now is whether France, which holds a coveted triple-A rating from all the major agencies, will be able to hang on to its status. A downgrade of France would have painful repercussions for the European bailout fund and for the euro.
Hungary’s public debt is uncomfortably high for an emerging-market country, equivalent to about 81 percent of its gross domestic product, a figure the government hopes to reduce to 50 percent by 2018. The budget deficit is relatively benign, and Mr. Orban has made keeping it under control a hallmark of his leadership, targeting a level of 2.5 percent of G.D.P. next year.
Moody’s warned that the outlook for the economy and government finances was being increasingly clouded by slowing growth, higher interest rates stemming from the euro crisis and the weakening of key export markets. Those risks are magnified by the fact that two-thirds of government debt is denominated in foreign currencies.
Hungary got a €20 billion, or $26.5 billion, bailout from the I.M.F. and European Union in 2008; it exited the fund’s stewardship last year.
Mr. Orban has enacted tough measures, widely described as “unconventional,” to keep the economy afloat. He has nationalized pension funds, imposed new taxes on services and decreed that Hungarians, many of whom borrowed in other currencies to finance their homes during the credit boom, can pay off their foreign-currency-denominated mortgages at artificially favorable rates — at the expense of mortgage lenders.
But those measures, many of which are one-time events, have run afoul of the I.M.F. and European Union, and some of them will probably have to be dismantled as the price of any new deal.
Tathagata Ghose, an economist with Commerzbank, wrote in a research note that the credit downgrade was not unexpected, as the Economy Ministry had itself suggested the action was imminent. “The negative connotation in terms of dwindling foreign capital participation is obvious,” Mr. Ghose said. “But, there could also be a positive outcome: We think that a much needed reversal to the present policy framework may finally be in prospect.”
Article source: http://www.nytimes.com/2011/11/26/business/global/moodys-downgrades-hungary.html?partner=rss&emc=rss
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