Fitch Downgrades Hungary's Credit Rating To Junk Citing Standoff

BUDAPEST, Hungary -- Fitch downgraded Hungary's credit rating to junk status on Friday, citing a standoff between the government and international lenders like the IMF and the European Union over possible rescue loans.

Fitch kept a negative outlook on Hungary, indicating a more than a 50 percent chance for another downgrade on the Central European nation of 10 million people within the next two years. The move followed similar action from Moody's and Standards & Poor's.

Hungary's shaky finances have been battered this entire week. Its currency, the forint, fell to all-time lows during two consecutive days and the government suffered through a rough bond auction Thursday in which the interest rates it had to paid to borrow jumped more than 2 percentage points in just a few weeks.

Investors are deeply unsure about the government's economic policies and whether it can agree upon a rescue loan with the International Monetary Fund.

Fitch Ratings' decision to cut Hungary's credit rating one notch, to BB+ from BBB-, was triggered partly "by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF-EU deal," said Matteo Napolitano, Director in Fitch's Sovereign Group.

Hungary late last year requested financial aid from the EU and the IMF. But the two institutions broke off preliminary negotiations in December amid concerns over new laws that hurt the independence of Hungary's central bank.

"Even if a (loan) agreement were to be reached, doubts would remain over whether the Hungarian government could submit to its strict conditionality, given its track record of policy unpredictability," Fitch said.

Government spokesman Andras Giro-Szasz said the downgrade was "surprising" considering statements from Prime Minister Viktor Orban and Tamas Fellegi, Hungary's chief financial negotiator, confirming the country's intention to soon reach an agreement with international creditors and affirming its support for the independence of the central bank.

Earlier Friday, Orban met with National Bank of Hungary President Andras Simor and the government's top economic officials. Orban dismissed market speculation that his conservative government was planning to raid central bank reserves to prop up the state budget and said it would do everything it can to support the central bank's efforts to stabilize the economy.

On Friday, the forint strengthened to around 215 per euro after falling as low as 224 per euro on Thursday.

Despite government pledges, investors are wary of government policies that boost budget revenues without unpopular austerity measures – such as windfall taxes on banks, telecommunications firms and others. They are also unnerved by Hungary's new constitution and new laws that have centralized political power and eroded democratic checks and balances.

Hungary has also been deeply affected by the eurozone's debt crisis – nearly 80 percent of its exports go to EU countries. Its domestic consumption has been weakened by high levels of household debt, including many mortgages held in soaring Swiss francs.

Many experts see the country falling back into a recession this year, though not as deeply as the 6.7 percent contraction in 2009.

Hungary was given a bailout of euro20 billion ($26 billion) in 2008 after the collapse of U.S. investment bank Lehman Brothers. Yet Orban, whose Fidesz party gained a two-thirds majority in parliament in April 2010 elections, chose to end the deal so IMF would not oversee Hungary's economic policy.

Comments

[bleichreoder]

02:08 PM on 01/07/2012

The dynamic here isn't too far away from what you saw in Argentina, where the first IMF package just ended up buying time and creating a sense of complacency that prevented real structural reform from being passed... The Orban administration has dug in its heels and I think things will get a lot worse before they get better. Pretty good commentary on Hungary here: http://creditbubblebath.blogspot.com/2012/01/hungarian-hot-pot.html

[MGLLC]

02:39 PM on 01/06/2012

The real story is the downgrading of the IMF, Hungary was a foregone conclusion. The IMF has been moving into all nations of the Euro offering loans on condition of austerity measures put forth by them, not the countries. Once a nation borrows from the IMF, they are forbidden to borrow from anyone else. With competiton removed, they raise the interest rates & bankrupt the countries. They forced Spain to sell off their 106 year old lucrative lottery to pay them interest on the money regardless the sale would make it nearly impossible for Spain to ever repay the debt.
Downgraded? They should be closed down.
Recently, they floated the idea of selling bonds themselves in competiton with nations like the USA who do it every day to increase their abilities to loan money. Leveraging averages 1000:1, risky at best. There is far less money in reality than on paper. Global GDP averages $50-65 trillion a year. Wall street shadow economy is at $600-800 trillion a year, that is just a tip of the iceberg. The entire global economy is on the brink of collapse.

[Peanut Santiago]

03:35 PM on 01/06/2012

It is all a type of ponzi scheme.

The stock marketers (including Wall Streeters), banksters, and the rich with the help of politicians are making out like bandits moving money around.
Buy, sell, whatever they do they make money (fees, etc.).

However, most of that money is on paper....imaginary if you will....and sooner or later, the whole corrupt financial house of cards will collapse.

They built a world wide economic foundation on shifting sand.

[frank day]

01:48 PM on 01/06/2012

Yields of nearly 9%.