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Fitch Considers Hungary Rating Cut After Pension Plan

Fitch Ratings may cut Hungary’s credit grade by the end of this year because the government’s plan to funnel private pension funds to the state may have a “negative impact” on fiscal sustainability.

Fitch rates Hungary’s debt BBB, the second-lowest investment grade, with a negative outlook, which means that the evaluator is more likely to cut the rating than to raise it or keep it unchanged. The company will make a decision by the end of this year, David Heslam, a director at Fitch Ratings in London, said in a phone interview today.

Prime Minister Viktor Orban’s Cabinet two days ago approved a plan to strip citizens of state pensions unless they move their private-pension fund savings to the state. The government is also levying special taxes on selected industries until at least 2014 to cut the budget deficit below the European Union limit of 3 percent of economic output next year.

"The reversal of pension reforms has a negative impact on the medium-term fiscal sustainability of public finances," Heslam said, adding that the measure would "reduce the immediate financing needs" of the government. "We are currently looking at developments and their medium term implications."

‘Being Undermined’

Hungary, the first EU member to obtain an International Monetary Fund-led bailout in 2008, cut its budget deficit to 4.4 percent of gross domestic product last year from 9.3 percent in 2006. Orban was elected in April on a pledge to end five years of austerity and boost growth after the worst recession in 18 years. He has pledged narrow the gap to less than 3 percent next year.

"The fiscal adjustment that has been carried out in Hungary since 2006 has been significant by EU standards, but recent announced measures suggest that correction is being undermined to some degree,’’ Heslam said.

With 3 trillion forint ($14.2 billion) in private pension-fund assets, Hungary is following the example of Argentina, which in 2001 confiscated some 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.

The Cabinet in Budapest is also using taxes on the financial, energy, retail and telecommunication industries to plug budget holes and fund a reduction in the personal income tax rate. 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.

“The initial signals are not particularly encouraging, with permanent expenditures being funded by temporary tax rises on utilities and banks,” Heslam said. “We are awaiting full information of policy as details are made available.”

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