Hungary’s credit rating has been cut to junk status by the rating agency Fitch, reflecting a growing concern about the country’s economic prospects and its political direction.
The ratings on both short- and long-term debt were lowered to F3 and BB+ respectively. The long-term outlook was kept unchanged, as ‘negative’.
The agency said that its decision to reduce the creditworthiness of Hungary’s debt to junk status “reflects further deterioration in the country’s fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF [International Monetary Fund] /EU deal”.
The IMF and EU last week suspended talks about financial support for Hungary after the European Central Bank criticised a new law on the role of the central bank and its relationship with the government.
Hungary has also been criticised by the European Commission for its inclusion of a flat tax into its new constitution, which came into force on 1 January. Other EU governments have been critical of a range of measures that have affected foreign companies operating in Hungary, including the levying of windfall taxes.
A government spokesman said that the move by Fitch was “surprising”.
However, the two other large rating agencies – Standard & Poor’s and Moody’s – had downgraded Hungary’s debt in December. Fitch had already slashed its 2012 growth forecast for Hungary’s economy.
The Hungarian currency, the forint, was not affected by the announcement. It has fallen sharply in value over recent months, to an all-time low yesterday (5 January).
The financial markets are deeply anxious about the state of Hungary’s finances, the stand-off between Hungary and the IMF/EU, and the mounting political pressure – within Hungary, from the European Commission, and from other EU governments – caused by concerns about the sweeping political reforms introduced by the government. The ruling party, Fidesz, has enough seats in parliament to change the constitution without needing the support of other parties, and it used that power to revise 30 laws as part of its change to the country’s constitution.
The government was unable to sell all the bonds it offered to the markets yesterday, and the bond yields demanded by investors rose above 10%. This is well above the 7% rate viewed as putting a country at risk of default.
Hungary has indicated that it is willing to modify the central-bank law in order to secure international backing.
Hungary’s prime minister, Viktor Orbán, said earlier today that “the government and the central bank agreed that an agreement [with the IMF] as soon as possible is in the interests of the economy”.
Hungary sought and received IMF/EU backing in 2008, but talks on extending the loan agreement collapsed after Orbán came to power in mid-2010.
The country will this year need to pay back some of the earlier IMF/EU loans, pay maturing bonds and reach agreement on rolling over – delaying the maturity – of €5 billion in external debt.
European banks are heavily exposed in Hungary. Their interests have been affected both by windfall taxes imposed by the government, and by concern about the future value of the loans that they have made to the government and to Hungarian businesses.
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