Hungary Credit Rating May Be Cut to Junk After IMF Talks Fail

Bloomberg | Jul 23, 2010

Standard & Poor’s said it may cut Hungary’s credit rating to junk after the collapse of talks with the International Monetary Fund and European Union. Moody’s Investors Service said it may also lower the country’s grade. The IMF and EU on July 17 suspended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The creditors provided Hungary with a 20 billion-euro ($25.9 billion) rescue package in 2008, which had served to reassure investors. “We believe that without an EU/IMF program to anchor policy, Hungary is likely to face higher and more volatile funding costs, which in our view could weigh on financial sector balance sheets, the public finances, and economic growth,” S&P said today in a statement. A rating downgrade would raise the cost of borrowing for Hungary at a time when the country is struggling to repair investor confidence after ruling party officials in June compared the country’s economy with Greece. S&P rates Hungary BBB-, its lowest investment grade. The Moody’s rating is two steps higher at Baa1. S&P will lower Hungary’s rating if in the coming year it concludes “government policies are unlikely to result in a meaningful decline in public debt,” it said in the statement.

Forint Falls

Hungary’s currency fell 1.1 percent to 286.83 per euro as of 3:15 p.m. in Budapest. The forint has dropped 8.1 percent in the past three months, making it the worst performer among more than 170 currencies tracked by Bloomberg. The cost of insuring Hungary’s government debt against default rose 14.5 basis points to 343, according to data provider CMA. “Running a higher budget deficit while losing your biggest potential supplier of capital isn’t a good mix,” said Kieran Curtis, who manages $2 billion in emerging market debt at Aviva Investors in London. “The market isn’t going to finance a higher budget deficit without an IMF agreement.” Hungary’s government said credit rating companies “don’t understand” that fiscal responsibility needn’t come at the expense of independent economic policy. “We’re going to continue a disciplined fiscal policy, which doesn’t equal the usual austerity policy that affects families and businesses,” the Economy Ministry said in an e- mailed response to questions from Bloomberg News.  

Bank Tax

An agreement with Hungary’s creditors may hinge on changing a special tax on the financial industry approved by parliament yesterday, S&P said. The levy may “impede the functioning of the financial system” by impairing banks’ ability to raise capital and make loans, the rating company said. The tax and some of the government’s other fiscal plans will be detrimental to growth, according to S&P. The government this week reiterated its commitment to meeting the IMF-approved budget deficit goal for this year of 3.8 percent of gross domestic product, while saying it won’t impose new austerity measures. Hungary’s deficit will be close to that target, S&P said. Hungary will discuss efforts to cut next year’s deficit with the EU and not the IMF, Orban said July 21 in Berlin, suggesting the Cabinet may step back from earlier plans to seek a “precautionary” loan from the Washington-based lender in 2011. The current IMF program ends in October. Hungary must “restore its economic self-rule” and focus on growth, Orban said yesterday in Parliament.

Moody’s Review

Moody’s also put Hungary on review for possible downgrade. The IMF and EU-backed loan program is a “crucial policy anchor” for Hungary, Moody’s said. “The focus of our review is to assess the ability and willingness of the Hungarian government to formulate a credible reform agenda,” Moody’s Vice President Dietmar Hornung said in an interview. “The progress of negotiations with the IMF is a key consideration.” The collapse of Hungary’s talks with international lenders prompted Societe Generale SA to turn “short-term bearish” on the forint, Benoit Anne, the bank’s head of global emerging markets, said in a note today. “The government simply cannot ignore the need for proper discussions with the IMF team on a revised fiscal program,” Anne said. A forint rate of around 284 per euro is “expensive relative to the mounting fundamental risks.” The government and central bank had gross foreign-currency debt of 37.4 billion euros ($48.1 billion) as of March 31, according to data from the central bank. Debt swelled to 78.3 percent of Hungary’s gross domestic product last year, compared with a European Union average of 73.6 percent, the European Commission said on May 5. Hungary’s budget deficit was 4 percent of GDP last year, above the EU limit of 3 percent.

‘Issues Remain Open’

The IMF suspended its review of Hungary’s emergency bailout because “a range of issues remain open,” the Washington-based lender said July 17. The government must make “tough decisions, notably on spending,” to meet deficit requirements, the EU said. The government refused to implement further austerity measures and pushed creditors to widen next year’s deficit target of 2.8 percent of GDP, Economy Minister Gyorgy Matolcsy said at the time. The country turned to international lenders in 2008 to avert a default after demand for its debt dried up amid the global financial crisis. At the time, the government suspended bond auctions, relying solely on its IMF credit line to repay debt and finance the budget.

External Debt

Regular debt sales resumed in April 2009, and Hungary has tapped international bond markets twice since. The debt management agency has missed its sales target at four forint- denominated auctions since June 3, when an official of the ruling Fidesz party said Hungary had a “slim chance to avoid a Greek situation.” Hungary’s external debt rose to 125 percent of GDP at the end of last year from 105 percent two years earlier, according to Deutsche Bank AG. Moody’s “believes that the country’s economy remains vulnerable because of the high foreign-currency indebtedness of both its private and public sector,” the rating company said. “Consequently, market confidence in both the government’s fiscal consolidation program and the value of its currency are considered very important.”


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