Hungary must redouble efforts to obtain International Monetary Fund aid and the central bank should raise rates to ease financing risks after Moody’s Investors Service cut the country’s credit grade to junk, said fund managers from Budapest to London.
Prime Minister Viktor Orban, who shunned seeking an IMF loan since coming to power last year until the forint fell to a record against the euro this month, may need to accelerate talks with the Washington-based lender to bolster investor confidence, fund managers at Aegon Fund Management, Aberdeen Asset Management, and K&H Fund Management said.
“They’ll either have to strike a quick deal with the IMF or the market will force them to,” Viktor Szabo, a London-based portfolio manager at Aberdeen, who helps manage about $7 billion in emerging-market debt, said in a telephone interview. “Hungary may stay one of the worst-performing markets if Europe’s crisis continues.”
The forint weakened 1.5 percent today and traded at 316.11 per euro at 7:15 p.m. in Budapest. It lost 16 percent since June 30, making it the worst-performing currency in the world. The government’s 10-year bonds slid, lifting the yield above 9 percent for the first time since 2009. Credit-default swaps rose to 646 basis points, a record high.
Hungary’s currency, bonds and credit-default swaps are under a “speculative attack” and the downgrade by Moody’s isn’t justified by the economy’s “strong fundamentals,” Economy Minister Gyorgy Matolcsy said at a press conference in Budapest.
The government must reach an agreement with the IMF on a credit line, he said, adding that Hungary doesn’t plan to use any aid and wants to continue financing debt from the markets.
“Hungary would like a flexible credit line, which, as its name suggests, is the most flexible one,” Matolcsy said. “It doesn’t look like we would be eligible for this so we would like a precautionary credit line or a precautionary standby agreement.”
The central bank will probably raise the benchmark two-week deposit rate to 6.5 percent from 6 percent on Nov. 29, after holding the two-week deposit rate unchanged since January, according to the median estimate of 10 economists in a Bloomberg survey taken after the downgrade.
After 15 Years
Hungary, which is seeking to reach an IMF agreement in the “first months” of next year, lost its investment-grade rating at Moody’s after 15 years as the debt evaluator cited risks to budget-deficit and public debt targets.
The foreign- and local-currency bond ratings were cut one step to Ba1 from Baa3, the company said in a statement yesterday. Moody’s assigned a negative outlook. The country is rated the lowest investment grade at Standard & Poor’s and Fitch Ratings.
Hungary’s foreign-currency debt maturing next year will soar to 1.37 trillion forint ($5.8 billion), a 48 percent increase from this year. That will rise to 1.48 trillion forint in 2013 and peak at 1.65 trillion forint in 2014 as Hungary repays the 20 billion-euro ($26.5 billion) bailout. Hungary had $51.3 billion in foreign-exchange reserves at the end of September, according to Bloomberg data.
“The downgrade is a signal to politicians that this IMF deal isn’t a game and things are turning serious,” Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest, said in a phone interview. “I expect the pace of negotiations with the IMF to accelerate.”
Premier Orban has relied on one-off measures, including the nationalization of $14 billion of mandatory private pension funds and extraordinary industry taxes to mask a swelling budget, whose deficit reached 193 percent of the Cabinet’s annual goal through October.
Hungary’s economy may expand between 0.5 percent and 1 percent in 2012 as Germany, the biggest market for Hungarian exporters, faces slower growth, Matolcsy said. The government earlier forecast 1.5 percent growth for 2012.
The debt level may drop to 75.9 percent of GDP this year from 81 percent last year because of one-off revenue from nationalized pension assets before rising to 76.5 percent next year, partly as a result of a weakening forint, the commission said. The government targets a budget gap of 2.5 of GDP in 2012.
Italy, Greece, Portugal
Investors are shunning riskier bonds as Italy, which has a bigger debt load than Spain, Greece, Ireland and Portugal combined, struggles to ward off contagion from the euro area’s debt crisis that started in Greece more than two years ago and threatens to infect weaker economies.
Portugal’s credit rating was cut to below investment grade by Fitch Ratings yesterday due to the country’s rising debt level and weakening economy.
The Hungarian government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened. Loan defaults are rising as borrowers struggle to repay foreign-currency mortgages, which account for more than two-thirds of housing loans, after a slump in the forint boosted repayments.
The government is also carrying out spending cuts, reducing drug subsidies, and increasing taxes to meet budget goals. The Cabinet announced plans to cut outlays by as much as $4 billion a year by 2013. The government also plans to raise taxes next year, including the value-added tax and excises.
S&P said yesterday it’s keeping Hungary’s sovereign-debt rating on “CreditWatch with negative implications” for longer than the one-month period it originally planned after the country approached the IMF for assistance. S&P said it may make a decision by February 2012.
Fitch Ratings on Nov. 18 said an IMF agreement would reduce pressure on Hungary’s credit rating, adding that a deal remained a “long way” off and would carry “strict conditionality.”
“We give a high chance for further downgrades to come in the upcoming months,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG, said in an e-mail.