Hungary's Credit Rating Cut by Fitch on Budget; Debt Grade Nears `Abyss'
Hungarian Prime Minister Viktor Orban
Balint Porneczi/Bloomberg
Hungarian Prime Minister Viktor Orban.
Hungarian Prime Minister Viktor Orban. Photographer: Balint Porneczi/Bloomberg
Hungary had its credit rating cut to the lowest investment grade by Fitch Ratings, which joined Moody’s Investors Service and Standard & Poor’s in questioning the sustainability of the new Cabinet’s fiscal policy.
Fitch downgraded Hungary one step to BBB-, the company said in a statement from London. The outlook for all three ratings companies is negative, which means they are more likely to reduce the rating to junk than to raise it or keep it unchanged.
“We are now only a step away from the abyss,” Gyorgy Barta, a Budapest-based economist at Intesa Sanpaolo SpA, said in a phone interview today.
Prime Minister Viktor Orban is bringing private pension funds under state control and imposed special taxes on banking, energy, telecommunications and retailing to narrow the budget gap below the European Union limit of 3 percent of gross domestic product next year and balance income tax cuts. Hungary is the EU’s most-indebted eastern member, with public debt estimated at 79 percent of GDP this year.
The forint slid 0.7 percent to 278.13 per euro at 3:53 p.m. in Budapest. The benchmark BUX stock index fell 0.7 percent. The cost of insuring Hungarian debt rose, with credit-default swaps increasing to 376.8 basis points from 375.2 basis points at 12:40 p.m in London.
The government will probably meet its target of reducing the 2011 deficit to 2.9 percent from an estimated 3.8 percent this year, Fitch said. The figure is “flattered by extra” revenue, which will leave a “substantial” deficit in later years as the special taxes ease, it said.
‘Wrong Direction’
Orban’s plans “go in the wrong direction for further fiscal consolidation,” Fitch said in a statement. “The reversal of pension reforms and lack of a coherent medium-term fiscal strategy undermines confidence in the long-term sustainability of the public finances.”
Fitch’s downgrade was "regrettable but unsurprising" and "failed to take into account" a plan to cut the debt level next year, the Economy Ministry said in a statement today. Government measures that "harm the interests and perspectives of global capital in the short term" led to the downgrade, the ministry said, adding that Hungary expects its credit ratings to rise in the "long term."
Following Argentina
With 3 trillion forint ($14.2 billion) in private pension fund assets, Hungary is following the example of Argentina, which in 2001 confiscated pension savings before the country stopped servicing its debt. The government in Buenos Aires nationalized the $24 billion industry two years ago to compensate for falling tax revenue after a 2005 debt restructuring.
Ratings companies put Hungary’s rating on review for a possible downgrade in July after economic-policy talks between the government and the International Monetary Fund failed. Hungary was the first EU member to obtain an IMF-led bailout in 2008. Orban ended IMF cooperation saying he needed “freedom” to conduct economic policy.
“The downgrade of Hungary’s ratings reflects a material worsening in the underlying medium-term budget position, while relatively high levels of public, external and domestic foreign- currency bank debt leave the country vulnerable to negative shocks,” Ed Parker, head of emerging Europe in Fitch’s Sovereigns team, said in the statement.
Ending Austerity
Elected in April on a pledge to end five years of austerity after the worst recession in 18 years, Orban plans to use the retirement fund assets to pay current government pensions and reduce debt as he seeks to cut the budget deficit.
The Cabinet is also using the special industry levies to plug budget holes and fund a reduction in the personal income tax. The government plans to announce spending cuts of as much as 800 billion forint at the end of February, Economy Minister Gyorgy Matolcsy said on Nov. 23 without providing details.
“This all goes to show the lack of budget sustainability and the fact there is little faith in the ratings agencies in the ‘structural plan’ coming in the new year,” London-based economist Peter Attard Montalto of Nomura International said in an e-mail.
‘Bold But Risky’
The downgrade came an hour before lawmakers were scheduled to approve the 2011 budget, which forecasts 3 percent economic growth and 3.5 percent inflation. The shortfall is estimated at 2.94 percent of GDP, down from 3.8 percent this year.
The budget plan is “bold but risky,” overestimating economic growth, Christoph Rosenberg, head of a visiting IMF delegation, said on Oct. 25 in Budapest. S&P estimated the shortfall may rise to 6 percent of GDP by 2014.
Moody’s downgraded Hungary by two steps on Dec. 6 to Baa3, its lowest investment grade. S&P on Nov. 3 maintained Hungary’s rating at BBB-, a step above junk.
“We need some time to have results,” Orban said at a Dec. 7 press conference in Stockholm. “In the close future, we will be upgraded again because the results will be on our side.”
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net
To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net
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