Moody’s Downgrades Hungary to Junk
Moody’s Investors Service has downgraded its credit rating for Hungary to junk, citing risks to budget-deficit and public debt targets.
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Hungary’s foreign- and local-currency bond ratings were cut one step to Ba1 from Baa3, according to a statement released yesterday. Hungary already has the lowest investment grade rating at Standard & Poor’s and Fitch Ratings.
The news comes a week after Hungary reversed a policy of shunning International Monetary Fund assistance after its currency — the forint — fell to a record low this month against the euro and government bond yields soared. In asking for assistance, Prime Minister Viktor Orban said he doesn’t want conditions attached to any credit line, a sign that Hungary is unwilling to step away from “unorthodox” policies like forcing banks to accept exchange-rate losses on foreign-currency mortgage loans.
‘‘Hungary’s attempts last week to voice readiness to cooperate with IMF was a ‘show,’ which was meant to prevent the rating agency action, yet it didn’t help, given Hungary’s unwillingness to compromise,” said Aurelija Augulyte, a Copenhagen-based economist at Nordea Bank AB (NDA). “Moody’s interpreted the Hungarian attempt to seek assistance from the IMF as a desperate move.”
The forint has been the world’s worst-performing currency against the euro over the past six months, declining 15% to a record-low 317.92 per euro on November 14. On news of the downgrade, the florint lost another 1.5% today as of 9:56 a.m. in Budapest. Hungary’s central bank warned on November 15 that it may need to raise interest rates to support the currency.
Meanwhile, the yield on Hungary’s benchmark 10-year bonds rose 55 basis points, or 0.55%, to 9.6%. That compares to a 10-year yield near 12% in Portugal and more than 26% in Greece. Yields for similar-maturity bonds were at 6% for Poland and about 4% for the Czech Republic. German yields are around 2%.
Hungary has relied on one-off measures, such as the nationalization of $14 billion of mandatory private pension funds and extraordinary industry taxes, to mask the swelling budget and a deficit that reached 193% of the Cabinet’s annual goal through October. In issuing its downgrade, Moody’s said the Cabinet’s plans to cut spending in the next three years faces “rising uncertainty” as growth slows.
Hungary’s economy is expected to expand just 0.5% in 2012 a tax increases and spending cuts slow growth, the European Commission projected on November 10. The debt level may drop to 75.9% of GDP this year from 81% last year because of one-off revenues, but will likely rise again to 76.5% next year, partly due to the weakening forint, said the commission.
“The first driver of today’s downgrade is the uncertainty surrounding the Hungarian government’s ability to meet its targets on fiscal consolidation and public-sector debt reduction,” Moody’s said in its statement. “Hungary’s recent requests for assistance from the IMF and the EU illustrate the funding challenges facing the country.”
Hungary has already scrapped two debt sales in the last three months, and has reduced the size of eight more.
The first EU member to obtain an IMF-led bailout in 2008, Hungary has rejected seeking IMF help since Orban was elected last year. The prime minister said he wanted more freedom to pursue “unorthodox” policies aimed at cutting Hungary’s debt level, while trying to meet a campaign pledge to end years of austerity measures. Economy Minister Gyorgy Matolcsy said asking the IMF for help would be “a sign of weakness.”
Orban’s “unorthodox” policies have included levying extraordinary taxes on the banking, energy, retail, and telecommunication industries, and forcing banks to accept exchange-rate losses exceeding 40% on foreign-currency mortgages. Hungarian loan defaults are rising as borrowers struggle to repay foreign-currency mortgages, which account for more than two-thirds of housing loans, after the florint’s slump.
Orban also stripped the Constitutional Court of its right to rule in most economic issues, dismantled an Independent Fiscal Council, and set up a new one dominated by his allies.
Orban’s government is carrying out spending cuts, reducing drug subsidies, and increasing taxes to meet budget goals. The cabinet plans to cut outlays by as much as $4 billion a year by 2013 and plan to raise taxes next year, including the value-added tax and excises.