Nov. 17 (Bloomberg) -- Hungary had its foreign-debt rating cut by Standard and Poor's, which cited strains on the country's ability to service its debt amid a drain on capital.

The rating was lowered one step to BBB, two levels short of junk, or non investment grade, according to a statement from S&P today from Frankfurt. It has a ``negative'' outlook, meaning the grade is more likely to be cut again than raised or left unchanged.

Hungary's economy shrank in the third quarter as investors fled higher-risk, emerging-market assets amid the global credit crisis, putting it on course for its first recession in 15 years. The government secured a 20 billion-euro ($25.3 billion) International Monetary Fund-led loan on Oct. 28 to help it meet its debt payments. Moody's Investors Service and Fitch Ratings also downgraded the country's debt over the past month.

``Limited availability of external funding, reduced external demand and a sharp slowdown in domestic lending will bring about an abrupt economic correction, a contraction of economic activity, and will put pressure on private sector and public sector balance sheets,'' S&P analyst led by Frankfurt- based Kai Stukenbrock said in today's statement.

The forint weakened as much as 0.6 percent to 269.17 per euro, trading at 268.65 at 3:08 p.m. in Budapest.

The downgrade is likely to raise the cost of borrowing for Hungary as it works toward adopting the euro in coming years. The government and central bank had gross foreign-currency debt of 20.5 billion euros ($26.2 billion) as of June 30, according to data from Magyar Nemzeti Bank, the central bank.

Government debt increased to 66 percent of Hungary's $138 billion gross domestic product last year, according to the European Union statistics office Eurostat.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net.

Last Updated: November 17, 2008 09:26 EST