Moody’s Cuts Hungary Credit by Two Grades on Budget

Moody’s Cuts Hungary’s Credit by Two Grades on Policy
Pedestrians walk past a shop sale sign in Budapest, Hungary. Photographer: Balint Porneczi/Bloomberg

Hungary’s sovereign credit rating was cut two levels by Moody’s Investors Service on concern that the government’s policy of plugging budget holes with “temporary measures” won’t be sustainable.

Moody’s downgraded Hungary to Baa3, its lowest investment grade, the company said today in a statement from Frankfurt. The outlook is negative, meaning Moody’s is more likely to reduce the rating to junk than it is to raise it or keep it unchanged. The decision brings Moody’s in line with Standard & Poor’s. Fitch Ratings ranks Hungary one step higher at BBB.

Prime Minister Viktor Orban is bringing private pension funds under state control and imposing special taxes on banking, energy, telecommunications and retailing to cut the budget gap to the European Union limit of 3 percent of gross domestic product next year. Hungary is the EU’s most-indebted eastern member, with debt estimated at 79 percent of GDP this year.

“Today’s downgrade is primarily driven by the Hungarian government’s gradual but significant loss of financial strength, as the government’s strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies,” Dietmar Hornung, Moody’s lead analyst for Hungary, said in the statement. “As a consequence, the country’s structural budget deficit is set to deteriorate.”

Most Vulnerable

The forint slid 1.3 percent to 280.27 per euro at 5:38 p.m. in Budapest, the second-biggest drop among 25 emerging-market currencies tracked by Bloomberg. The yield on the benchmark five-year government bond rose 7 basis points to 8.04 percent. The BUX Index of stocks fell 0.7 percent.

Hungary been given a “clear warning” that it needs to “correct policy and address concerns over the sustainability of public finances,” Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said today in an e-mailed note. “There is now a clear risk that, at some time over the next year, Hungary loses its investment grade status.”

With 3 trillion forint ($14.2 billion) in private pension fund assets, Hungary is following the example of Argentina, which in 2001 confiscated about $3.2 billion of 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.

Moody’s put Hungary’s rating on review for a 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.

Protecting Popularity

Orban, elected in April on a pledge to end five years of austerity after the worst recession in 18 years, plans to use the retirement fund assets to pay current government pensions and reduce debt as he seeks to cut the budget deficit. He backtracked on a campaign pledge to “defend” private pension funds with the plan to liquidate them.

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.

“The government is relying only on short-term measures and doing everything to avoid losing popularity,” said Daniel Bebesy, who oversees $1.5 billion at Budapest Investment Management. “We don’t see any signs of structural changes, only the patching of budget holes by spending the private pension fund savings.”

2011 Budget

The downgrade came after the government unveiled a 2011 budget that 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.

“Moody’s downgrade didn’t surprise us, but we were sorry to hear it,” Matolcsy told MTI news service in an interview. “We feel it necessary to announce a structural reform package in the spring which we hope Moody’s will take into account at its next evaluation.”

Moody’s “didn’t take into account” the government’s plan to cut the deficit or that the Cabinet targets a reduction in the debt level in 2011, Matolcsy said, according to MTI.

The government’s measures are sufficient to meet short-term budget targets while failing to address the “structural deficit” that may lead to a shortfall of 6 percent of GDP by 2014, Standard & Poor’s said Nov. 3.

The budget plan is “bold but risky,” overestimating economic growth, Christoph Rosenberg, head of a visiting IMF delegation, said Oct. 25 in Budapest. The Washington-based lender estimates the economy will grow 2.5 percent next year.

“We will be looking very closely at the consolidation measures the government has promised to announce next year and they will obviously feed into the larger picture,” Hornung said in a phone interview. “Thee measures themselves won’t necessarily trigger a rating action on our part, but they will be a key element of our assessment.”

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