Hungarian Prime Minister Viktor Orban’s drive to consolidate power at the cost of delaying an International Monetary Fund bailout prompted Standard and Poor’s to become the second ratings company in a month to downgrade the country’s debt to junk.
Hungary’s sovereign-credit ratings were cut one step to BB+ from BBB-, S&P, which had rated the eastern European nation at investment grade since 1996, said yesterday in a statement, assigning a negative outlook. Moody’s Investors Service lowered its assessment to Ba1, the highest junk grade, on Nov. 24, while Fitch Ratings has assigned its lowest investment grade, BBB-.
Lawmakers are scheduled to approve changes to a draft central bank law tomorrow and pass the bill next week, which the European Central Bank said today may “undermine” monetary policy independence. The IMF and the European Union cited the draft for breaking off financing talks with Hungary last week. IMF backing would bolster policy credibility, S&P said.
“S&P didn’t wait for the conclusions of the negotiations with the IMF on a new program as a sign that the policy backdrop has deteriorated substantially,” Benoit Anne, head of emerging-markets strategy at Societe Generale SA in London, said today by e-mail.
The European Commission hasn’t decided on whether to resume financial aid talks with Hungary, the EU executive’s representative in Budapest, Tamas Szucs, said in an e-mail today. Earlier today, Olivier Bailly, a spokesman for the Commission, told reporters in Brussels that preliminary formal discussions over an aid package will begin in January.
Debt Sale, Forint
Hungary sold 30 billion forint ($128 million) in 12-month bills today, 10 billion forint less than planned, as the average yield surged to 7.91 percent, the highest in almost 2 1/2 years. The yield on Hungary’s 2022 bond climbed 41 basis points, or 0.41 percentage point, to 9.385 percent, the highest in a month.
The forint weakened to 307.43 per euro at 3:32 p.m. in Budapest from a Dec. 20 close of 300.37. It’s lost 13 percent since June 30, the worst performance among more than 170 currencies tracked by Bloomberg. The forint fell to a record against the euro last month and the government struggled to meet its targets at debt auctions before the Moody’s downgrade.
Hungary’s five-year credit-default swaps, which measure the cost of insuring state debt against non-payment, rose 43 basis points to 617, a three-week high. They were the ninth-highest in the world yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers.
The central bank raised its benchmark interest rate to 7 percent on Dec. 20 from 6.5 percent, which was already the EU’s highest. Policy makers said they may increase borrowing costs further if risk perception and the inflation outlook deteriorate “substantially.”
The government asked for IMF aid last month to ensure debt financing next year as yields soared and S&P signaled its potential downgrade. The Cabinet is aiming for an agreement in the first few months of next year. The country is ready for “unconditional talks,” Tamas Fellegi, the minister in charge of negotiations, said Dec. 16.
“We believe S&P’s move may be followed by Fitch and rating downgrades are likely to intensify pressure on the government to make the required amendments to the constitution,” Eszter Gargyan, an economist at Citigroup Inc. in Budapest, said today in an e-mailed note. “Even if talks are delayed until spring 2012, the government is likely to be pushed into a position where it has to accept conditionality.”
Orban shunned IMF aid after taking office last year to protect what he called “unorthodox” measures from oversight. Hungary will have the highest debt level and slowest economic growth among the EU’s eastern members next year, the European Commission forecast on Nov. 10.
The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to control the budget, which had a deficit of 182 percent of the Cabinet’s full-year target at the end of November.
Hungary also forced banks to swallow losses on foreign-currency mortgages. The measures may hinder economic growth and are “likely to depress investment and job creation in the short term,” S&P said.
Orban, backed by a two-thirds parliamentary majority that allows him to unilaterally change the constitution, pressed ahead with consolidating his power.
‘Almost Total Takeover’
Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.
The draft central bank law, which seeks to expand the rate-setting Monetary Council, add another vice president and strip the central bank chief of his right to appoint deputies, is part of a government drive toward an “almost total takeover” of the institution, Magyar Nemzeti Bank President Andras Simor said Dec. 15. A separate plan to merge the financial regulator and the central bank and demote the central bank president also violates EU rules, Simor has said.
“Changes to the constitution and the functioning of some independent institutions, including the central bank and the constitutional court, have undermined Hungary’s institutional effectiveness,” S&P said. “The predictability of Hungary’s policy framework continues to weaken, harming Hungary’s medium-term growth prospects.”
The European Commission has “serious doubts” about the central bank law and President Jose Barroso conveyed his “strong concerns” in a letter to Orban, Pia Ahrenkilde Hansen, a spokeswoman, told reporters in Brussels Dec. 20. The Commission hasn’t received a response to the letter from Hungary, Bailly said today.
The ECB today took issue with both the draft central bank law as well as a bill ruling party officials plan to approve next week, allowing them to demote the head of the central bank to vice president of a combined institution with the financial regulator.
“Three major revisions of the central bank law in 18 months are incompatible with the principle of legal certainty,” the Frankfurt-based ECB said in a statement today.
Investors are shunning riskier assets and demanding higher yields as European leaders grapple with the euro area’s sovereign-debt crisis, which started in Greece more than two years ago and is threatening to infect weaker economies.
S&P is studying the outcome of an EU summit earlier this month to streamline fiscal policies before deciding whether to go ahead with its threat to cut the credit rating of 15 euro-region nations, the company said on Dec. 9.
Hungary’s downgrade by S&P addresses the euro crisis, rather than Hungary, the Economy Ministry said in a statement yesterday, according to state-run news service MTI. Hungary is a victim of “that struggle” and indirectly of “financial attacks.”
“This decision by S&P is very visibly not based on an evaluation of the facts about the Hungarian economy and financial system, but is a form of pressure being exercised by market players with an interest in strengthening the dollar region and weakening the euro zone,” the ministry said, according to MTI.
Orban plans to cut debt from 81 percent of economic output last year and is seeking to keep the budget deficit within 2.5 percent of gross domestic product next year.
Hungary’s economic growth may slow to 0.5 percent in 2012 from 1.4 percent this year, the European Commission said Nov. 10. Debt may fall to 75.9 percent of GDP this year before rising to 76.7 percent in 2012, the EU’s executive branch said.
“S&P purposely ignored that there has recently been a positive change in the gauges that serve as the basis of the evaluation,” the Economy Ministry said.
Hungary needs “disciplined” budget policy, debt reduction and the “revving up of the engines of growth” to shield the country from the negative effects of the euro crisis, it said.
The government aims to complete as much of its 4 billion-euro foreign-currency debt issuance plan as possible in the first half of 2012, Laszlo Andras Borbely, Deputy Chief Executive Officer of the State Debt Management Agency, told reporters today. The state probably won’t issue Eurobonds before completing IMF aid talks, he said. It doesn’t see “panic” selling of Hungarian debt after S&P’s downgrade, Borbely said.
The government is also cutting spending and raising taxes to save as much as $4 billion a year by 2013 as part of the so-called Szell Kalman plan to overhaul the economy.
The implementation of the Szell Kalman plan, which includes trimming welfare spending, making state administration more efficient and putting in place policies that encourage investment, may “dissipate or even reverse” downward pressure on Hungary’s ratings, S&P said.