Standard & Poor's Ratings Services on Wednesday downgraded Hungary's credit rating to "junk" level because of worries about proposed policy changes regarding the country's central bank.
The S&P analysts lowered their ratings on Hungary's debt to the non-investment grade with a "Negative" outlook. That means there is at least a 1-in-3 possibility of another downgrade over the next year if Hungary's fiscal performance deteriorates.
The lower rating could mean that Hungary has more difficulty borrowing, and have to pay higher rates on its debt. Moody's, a rival credit-ratings agency, had downgraded Hungary's rating to junk status in late November.
The S&P analysts said Wednesday that policy changes related to Hungary's central bank appear to curtail the bank's independence. Such changes complicate the operating environment for investors, the S&P analysts said. They're likely to have a negative impact on investment and fiscal planning, which will weigh on Hungary's medium-term growth prospects, S&P concluded.
"The downgrade reflects our opinion that the predictability and credibility of Hungary's policy framework continues to weaken," they said.
Prime Minister Viktor Orban's government has taken steps to gain greater influence over the National Bank of Hungary, led by Andras Simor. A new law regulating the central bank is being debated in Parliament. The government is also laying the legal groundwork for the possible merger of the central bank and Hungary's financial regulator.
On Friday, the European Union and the International Monetary Fund also broke off preliminary talks with Hungary on a financial aid package because of concerns about the central bank.
Hungary said last month it would seek to work out a deal for unspecified aid from the IMF and the EU, a "security net" to reassure investors about its creditworthiness and financial stability. Formal talks between Hungary and the IMF and EU were supposed to begin in January. It was not clear yet how Friday's move would affect those talks.
S&P analysts said the authorities have indicated that negotiations are likely to resume then.
S&P said other factors also figured into its downgrade. The weak economy in other countries could affect Hungary, as well as the country's imposition of temporary tax hikes on various services that S&P said is likely to depress investment and job creation in the short term.
The ratings agency cut its long- and short-term sovereign credit ratings on Hungary to "BB+/B" from "BBB-/A-3."
Earlier this month, S&P threatened to lower its rating on 15 European countries – even Germany, the most powerful economy in Europe – if their leaders don't agree on a tough response to the European debt crisis.