Hungary's Credit Rating May Be Lowered by Moody's After IMF-EU Talks Fail
The forint fell 0.7 percent
Balint Porneczi/Bloomberg
Hungary'S prime minister Viktor Orban.
Hungary'S prime minister Viktor Orban. Photographer: Balint Porneczi/Bloomberg
Moody’s Investors Service said it will review Hungary’s credit rating for possible downgrade, the first rating company to react to the collapse of negotiations with the International Monetary Fund and European Union.
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 has served to reassure investors.
“The focus of our review is to assess the ability and willingness of the Hungarian government to formulate a credible reform agenda,” Dietmar Hornung, a vice president at Moody’s, said in an interview. “A continued program with the IMF and the EU would represent a substantial policy anchor and give reassurance to the fiscal path.”
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 to Greece. Moody’s rates Hungary’s debt Baa1, its third-lowest investment grade. That’s higher than Fitch Ratings, which gives Hungary its second-lowest investment grade, and Standard & Poor’s at the lowest.
The forint fell 0.8 percent to 285.77 as of 12:20 p.m. in Budapest. The forint has dropped 7.8 percent in the past three months, making it the worst performer among more than 170 currencies tracked by Bloomberg. Credit default swaps on Hungary’s five-year debt widened by 7.6 basis points to 336 after the Moody’s statement, according to data provider CMA.
Deficit Target
The government has said it is committed to meeting an IMF- approved budget deficit target of 3.8 percent of gross domestic product for this year.
Hungary will discuss efforts to cut next year’s deficit with the EU and not the IMF, Orban said July 21 in Berlin, suggesting the Cabinet may step back from earlier promises to seek a “precautionary” loan from the Washington-based lender in 2011. The current IMF program ends in October.
Hungary must “restore its economic self rule” and focus on growth, Orban said yesterday in Parliament.
Moody’s said the loan program backed by the IMF and EU is a “crucial policy anchor” for Hungary.
“The progress of negotiations with the IMF is a key consideration,” Hornung said.
‘Cannot Ignore’
The collapse of Hungary’s talks with international lenders prompted Societe Generale SA to turn “short-term bearish” on the forint, Benoit Anne, the bank’s head of global emerging markets, said in a note today.
“The government simply cannot ignore the need for proper discussions with the IMF team on a revised fiscal program,” Anne said. A forint rate of around 284 per euro is “expensive relative to the mounting fundamental risks.”
The government and central bank had gross foreign-currency debt of 37.4 billion euros ($48.1 billion) as of March 31, according to data from the central bank. Debt swelled to 78.3 percent of Hungary’s gross domestic product last year, compared with a European Union average of 73.6 percent, the European Commission said on May 5.
Hungary’s budget defict was 4 percent of GDP last year, above the EU limit of 3 percent.
‘Issues Remain Open’
The IMF suspended its review of Hungary’s emergency bailout because “a range of issues remain open,” the Washington-based lender said in a July 17 statement. The government must make “tough decisions, notably on spending,” to comply with deficit requirements, the EU said.
The IMF delegation is expected to return to Budapest in September, and Hungary will eventually reach an agreement with its lenders, Economy Minister Gyorgy Matolcsy said July 19 at a news conference in Vienna.
The government refused to implement further austerity measures and pushed creditors to widen next year’s deficit target of 2.8 percent of GDP, Matolcsy said.
The country turned to international lenders in 2008 to avert a default after demand for its debt dried up. At the time, the government suspended bond auctions, relying solely on its IMF credit line to repay debt and finance the budget.
Regular debt sales resumed in April 2009, and Hungary has tapped international bond markets twice since. The debt management agency has missed its sales target at four forint- denominated auctions since June 3, when an official of the ruling Fidesz party said Hungary had a “slim chance to avoid a Greek situation.”
Moody’s “believes that the country’s economy remains vulnerable because of the high foreign-currency indebtedness of both its private and public sector,” the rating company said. “Consequently, market confidence in both the government’s fiscal consolidation program and the value of its currency are considered very important.”
To contact the reporter on this story: Balazs Penz in Budapest at bpenz@bloomberg.net.
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