Hungary slams junk status

BUDAPEST, Hungary - The Associated Press

A Hungarian currency trader reacts at his desk in the dealing room of a bank in the capital city of Budapest on Nov 16. Hungary’s forint fell sharply on Nov. 25 after a Moody’s decision to cut the country’s credit rating. REUTERS photo

The downgrade to junk status of Hungary’s credit rating by Moody’s is part of a series of “financial attacks” against the country, Hungary’s economy ministry said Friday.

Moody’s Investors Service, one of the three main credit rating agencies, cut its ranking of Hungary’s government bonds by one notch, from Baa3 to Ba1, pushing its valuation of the country’s debt from investment grade to junk status. Moody’s also kept its negative outlook on expectations for Hungary.

There were widespread expectations for a downgrade, so initial market reaction to the decision was restrained. Still, yields on Hungarian debt have been creeping upward and the national currency, the forint, weakened against the euro. Early Friday, the forint fell to 316.60 per euro, 1.7 percent weaker than its opening rate.

“Since there is no real basis for Moody’s evaluation, the Hungarian government can’t interpret it differently than as part of the financial attacks on Hungary,” the ministry said in a statement. “It has no basis because, despite all the external difficulties, in the past year and a half there has been an expressly favorable change in most areas of the Hungarian economy.”

Illustrating its point, the ministry mentioned Hungary’s current account surplus, the falling budget deficit, a significant cut to state debt levels and economic growth which exceed the European Union average in the third quarter of the year.

“The first driver of the downgrade is the uncertainty surrounding the Hungarian government’s ability 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,” Moody’s said late Thursday. “The second driver ... is the country’s vulnerability to external shocks stemming from the government debt structure, which could in turn expose the government to funding cost pressures.”

Dangerous exposure

Moody’s noted that foreign investors hold 64 percent of Hungary’s bonds, of which two-thirds are denominated in foreign currencies. A weaker forint makes it more expensive for the government to pay back its foreign-currency debts.

Moody’s, which first awarded Hungary an investment-grade rating in 1996, said a further downgrade could come is “there is a significant decline in government financial strength due to a lack of progress on structural reforms,” while “a more consistent implementation” of the government’s planned reforms and economic program could make the agency consider stabilizing its rating.

In late 2008, Hungary became the first EU country to receive an IMF-led bailout, getting a a 20-billion-euro standby loan to avoid defaulting on its debts. Last year, however, Prime Minister Viktor Orban decided to break away from the IMF, preferring instead to make Hungary finance itself from the markets. This blocked the IMF’s direct influence on Hungary’s economic policy and gave the government a free hand to experiment with unorthodox approaches.

To avoid unpopular austerity measures, the government introduced windfall taxes on the energy, banking and other sectors, nationalized some $14 billion in assets managed by private pension funds and allowed indebted households to repay mortgages in foreign currencies at exchanges rates far below market values. It was a combination of these controversial moves and the perceived rise of Hungary’s vulnerability which led to the ratings downgrade