Hungary Credit Rating Cut to Junk at Moody’s

By Zoltan Simon - Nov 25, 2011 4:21 PM GMT+0700

Hungary, which last week turned to the International Monetary Fund for help, lost its investment- grade rating at Moody’s Investors Service, which cited risks to budget-deficit and public debt targets.

The foreign- and local-currency bond ratings were cut one step to Ba1 from Baa3, the company said in a statement yesterday. Moody’s, which awarded Hungary its investment grade in 1996, assigned a negative outlook. The country is rated the lowest investment grade at Standard & Poor’s and Fitch Ratings.

The government reversed a policy of shunning IMF assistance after the forint fell to a record low this month against the euro and government bond yields soared. Prime Minister Viktor Orban said he doesn’t want conditions attached to any new credit line, a sign that Hungary isn’t prepared to step away from its “unorthodox’ policies that included forcing banks to swallow 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,” Aurelija Augulyte, a Copenhagen- based economist at Nordea Bank AB (NDA), said in an e-mail today. “Moody’s interpreted the Hungarian attempt to seek assistance from the IMF as a desperate move.”

Forint, Stocks, Bonds

The forint, the world’s worst-performing currency against the euro over the past six months with a 15 percent drop, plunged to a record-low 317.92 per euro on Nov. 14. It lost 1.5 percent today to trade at 316.25 per euro at 9:56 a.m. in Budapest. The central bank on Nov. 15 warned it may need to raise interest rates to support the currency. OTP Bank Nyrt., Hungary’s largest lender, dropped 5 percent to 2,894 forint.

The yield on Hungary’s benchmark 10-year bonds rose 55 basis points, or 0.55 percentage point, to 9.6 percent, the highest since the security was first sold in January. That compares with 10-year yields near 12 percent for Portugal and more than 26 percent for Greece, according to generic prices compiled by Bloomberg.

Yields for similar-maturity bonds were at 6 percent for Poland and about 4 percent for the Czech Republic. German yields were traded for about 2 percent, data compiled by Bloomberg shows.

‘Financial Attack’

Orban has relied on one-off measures, including the nationalization of $14 billion of mandatory private pension funds and extraordinary industry taxes to mask a swelling budget, whose deficit reached 193 percent of the Cabinet’s annual goal through October. The Cabinet’s plans to cut spending in the next three years face “rising uncertainty” as growth slows, Moody’s said.

“Since Moody’s decision has no realistic basis, the Hungarian government can only interpret this as being part of a financial attack against Hungary,” the Budapest-based Economy Ministry said in an e-mail today.

Hungary’s economy may expand 0.5 percent in 2012 as tax increases next year and spending cuts will probably slow growth, the European Commission, the EU’s executive arm, said on Nov. 10.

The debt level may drop to 75.9 percent of GDP this year from 81 percent last year because of one-off revenue from nationalized pension assets before rising to 76.5 percent next year, partly as a result of a weakening forint, the commission said. The government targets a budget gap of 2.5 of GDP in 2012.

‘Funding Challenges’

“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.”

Investors are shunning riskier bonds as Italy, which has a bigger debt load than Spain, Greece, Ireland and Portugal combined, struggles to ward off contagion from the euro area’s debt crisis that started in Greece more than two years ago and threatens to infect weaker economies.

Portugal’s credit rating was cut to below investment grade by Fitch Ratings yesterday due to the country’s rising debt level and weakening economy.

The Hungarian government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened.

First EU Bailout

Hungary was the first EU member to obtain an IMF-led bailout in 2008. Since winning elections last year, Orban had rejected seeking IMF help, saying 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. Asking the IMF for help would be “a sign of weakness,” Economy Minister Gyorgy Matolcsy told Heti Valasz in its Oct. 27 issue.

Orban’s steps included levying extraordinary taxes on the banking, energy, retail and telecommunication industries and forcing banks to swallow exchange-rate losses exceeding 40 percent 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 a slump in the forint boosted repayments.

The Constitutional Court was stripped of its right to rule in most economic issues. An independent Fiscal Council was dismantled and a new one set up dominated by Orban’s allies.

‘No Limit’

The government is also carrying out spending cuts, reducing drug subsidies, and increasing taxes to meet budget goals. The Cabinet announced plans to cut outlays by as much as $4 billion a year by 2013. The government also plans to raise taxes next year, including the value-added tax and excises.

Hungary may reach an agreement with the IMF and the EU “in the first months of next year,” the Economy Ministry said in a Nov. 18 e-mail. “No one can limit Hungary’s economic sovereignty,” Orban said the same day.

S&P said yesterday it’s keeping Hungary’s sovereign-debt rating on “CreditWatch with negative implications” for longer than the one-month period it originally planned after the country approached the IMF for assistance. S&P said it may make a decision by February 2012.

Fitch Ratings on Nov. 18 said an IMF agreement would reduce pressure on Hungary’s credit rating, adding that a deal remained a “long way” off and would carry “strict conditionality.”

“We give a high chance for further downgrades to come in the upcoming months,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG (RBI), said in an e-mail.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net