Hungary Downgrade Threat Upheld as S&P Seeks Detail on Policy
Hngary's Prime Minister Viktor Orban
Balint Porneczi/Bloomberg
Since Prime Minister Viktor Orban took office in May pledging to boost growth and end five years of austerity Hungarian assets have underperformed other emerging markets.
Since Prime Minister Viktor Orban took office in May pledging to boost growth and end five years of austerity Hungarian assets have underperformed other emerging markets. Photographer: Balint Porneczi/Bloomberg
Hungary’s commitment to cut the budget deficit hasn’t removed the threat to its investment-grade debt rating because the government needs to clarify its economic policies, Standard & Poor’s said. Moody’s Investor Service, also mulling a downgrade, said fiscal plans will steer its decision.
Prime Minister Viktor Orban’s government last week pledged to reduce the 2011 shortfall to below the European Union limit of 3 percent of gross domestic product, two months after falling out with international lenders over the same targets.
“We don’t take a substantial amount of comfort in the government announcements about bringing down the deficit,” Trevor Cullinan, an analyst at Standard & Poor’s in London, said yesterday in a phone interview. “We’re much more interested to see the government’s medium-term fiscal and economic policy.”
S&P on July 23 reduced the outlook on Hungary’s BBB- rating to negative after talks broke down with the International Monetary Fund and the EU on a review of the country’s 20-billion euro ($26 billion) rescue loan. The company cited eastern Europe’s highest public debt and a new bank tax it said was “harmful” for the economy as reasons for a possible downgrade.
A one-step cut would reduce Hungary’s rating to junk at S&P for the first time since 1992, putting the country on par with Azerbaijan and Romania, and increasing borrowing costs.
Moody’s Investors Service, which rates Hungary Baa1, two grades higher than S&P, also said in July it was reviewing the country for possible downgrade. The ratings agency said today it plans to conclude the review on the grade in November.
‘Anchor’ Expectations
“Credibility and the ability to anchor fiscal expectations is an issue” for Hungary, Frankfurt-based Moody’s analyst Dietmar Hornung said in a phone interview today. “What we need to look at is a consistent and comprehensive package for 2011 and beyond by the government.”
A loan agreement with the IMF and the EU would be “reassuring,” he said. “The conditionality and the monitoring that comes with an IMF program would be helpful.”
“The rating agencies are taking the same line as the markets and giving the government until local elections in October the benefit of the doubt, but if they don’t see then either a recommitment to the IMF program, or real concrete measures I think they move to cut the rating to junk,” Timothy Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London, said in an e-mailed note.
Policy Reversals
Hungarian assets have underperformed other emerging markets since Orban took office in May pledging to boost growth and end five years of austerity. The new government has also undermined investor confidence with a series of policy reversals, such as indicating it would seek a precautionary loan from the IMF after the current program expires, then indicating it didn’t need one.
“It makes you wonder whether it will need a rating downgrade really to concentrate politicians’ minds,” Ash said.
The forint has fallen 4.2 percent against the euro this year, making it the worst performer among 25 emerging-market currencies tracked by Bloomberg. The currency was at 282.19 as of 5:43 p.m. today in Budapest.
“The government’s announcement about specific targets isn’t sufficient for us to be able to go back to a stable outlook as there are significant uncertainties,” Cullinan said. He declined to give forecasts for Hungary’s budget deficit this year and next “because of the uncertainties about what the government is actually going to do.”
‘Watching Closely’
S&P “will be watching closely” to see whether the government restarts negotiations with the IMF about its loan program and the impact of local elections next month on policy, Cullinan said. S&P will also expect “stronger announcements about fiscal consolidation,” he said.
While re-engagement with the IMF isn’t a requirement for changing the outlook to stable, it would be a “supportive factor,” Cullinan said.
The continuation of the bank tax in the next two years would increase the chances for a cut in the debt rating, he said.
Hungary in July imposed a tax on financial services equal to 0.5 percent of assets more than 50 billion forint ($223 million) over the objections of the EU and the IMF. The levy, which will raise about 187 billion forint annually, is about three times larger than those proposed elsewhere in Europe.
“One of the reasons we put the ratings on negative outlook was the specific concerns we had with regards to the government’s policy, particularly the bank tax,” Cullinan said. “These concerns and uncertainties still remain in place.”
Mortgage Relief
Further concerns include the government’s relationship with the central bank and a relief plan for mortgages, many of which are denominated in Swiss francs and euros and have fallen into arrears after the forint declined, driving up costs of repaying such loans. The measures could have “consequences in terms of EU sanctions and further strain relationships with the banks,” Cullinan said.
“There are lots of moving parts and the negative outlook remains until we have some clarity and enough information on whether to go back to stable or potentially to downgrade to non- investment grade,” Cullinan said. “There are conflicting signals and we need some time to be able to assess what the government’s overall policy will be over the medium term.”
To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net
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