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.
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.
Reuters | Mon Jul 19, 2010 | 3:52pm IST
Hungary’s markets sold off on Monday after talks with lenders fell through at the weekend, rattling investor confidence in the government’s policies and raising concerns over the country’s debt vulnerability. Hungary’s government had insisted on a new financial sector tax this year and rebuffed lenders’ calls for further austerity measures, the economy minister said on Monday. The forint plunged over 2.5 percent versus the euro and yields surged 20-30 basis points as the collapse of the talks — intended to review the IMF/EU financing deal Hungary struck in 2008 — dealt the second major blow to investor confidence since the new centre-right government took power in May. In early June, officials alarmed markets by comparing Hungary’s problems with those of Greece.
The International Monetary Fund and European Union have both said the government needs to take tougher measures to rein in the budget deficit. Analysts said market weakness could spill over to other markets in the central European region, and the sell-off would likely to push the Hungarian government to reach agreement with its lenders soon. "Arguably continued adherence to the current IMF programme had anchored both markets and Hungary’s (credit) ratings: the fact that Hungary is now going off-piste suggests both may be under threat," said Timothy Ash at Royal Bank of Scotland.
RATE RISE TALK
Hungary, which runs central Europe’s highest public debt at about 80 percent of gross domestic product (GDP), won’t be able to use remaining funds in its 20 billion euro ($26 billion) loan secured in 2008 until it reaches a deal with the IMF and EU. Even though Hungary is not under immediate financing pressure, such delays would raise its financing costs, potentially forcing the central bank to raise interest rates and putting pressure on Hungary’s ratings, analysts said. The central bank will hold a regular rate meeting on Monday with a rate decision
Reuters Fri Jul 16, 2010 11:02pm IST
Hungary risks a suspension of its IMF/EU aid and a market selloff if current talks fail to resolve differences with lenders about its economic programme and budget plans, analysts said on Friday. The sticking points are the 2011 budget deficit goal, a tax on banks to plug this year’s budget hole, and a planned state-run fund to help troubled borrowers, local media reported. If the centre-right government fails to reach a deal with the International Monetary Fund and the European Union, Hungary’s financing costs could surge, even though it does not need IMF money at the moment, analysts said. Hungary — which resorted to an IMF/EU bailout in 2008 — has been financing itself through the markets. But it still needs the lenders’ safety net to retain investors’ trust, given its high public debt at 80 percent of gross domestic product (GDP) and strong reliance on foreign financing.
Failing to reach a deal "would be like lighting a gunpowder barrel which we are sitting on," said Zoltan Torok, analyst at Raiffeisen. "My baseline scenario is that there will be an agreement in this negotiation round … and they (IMF) will release the next tranche of the loan as there’s such a strong pressure to agree." Hungary’s markets slumped in June after comments by some officials comparing the country’s financial situation to that of troubled Greece. The government has calmed investors with planned measures to contain this year’s deficit, but the European Union in particular is expected to insist Hungary brings next year’s deficit below the bloc’s official 3 percent of gross domestic product (GDP) ceiling. The government wants more fiscal room to boost the economy. Economy Minister Gyorgy Matolcsy told Reuters earlier this month that for next year the government hopes lenders would agree to a 3.0-3.8 percent deficit, in exchange for structural reforms.