Hungary’s Third Downgrade to Junk in Two Months Pares Bond Rally

Hungary Bonds Pare Gain, Fitch Cuts Credit Rating to Junk
Hungary’s currency advanced 0.8 percent to 317.75 against the euro, after climbing 1 percent, at 2:33 p.m. in Budapest. Photographer: Balint Porneczi/Bloomberg

Hungarian bonds pared gains after Fitch Ratings became the third company in two months to cut the country’s credit ranking to junk as the government worked to restart talks on an international bailout.

Ten-year government bonds yields fell 33 basis points to 10.072 percent, after dropping as low as 9.9 percent earlier today, according to generic prices compiled by Bloomberg. The yield has risen 17 basis points in the past five days, the fifth week of advances.

Fitch cut Hungary’s long-term foreign- and local-currency ratings by one level after similar moves by Standard & Poor’s and Moody’s Investors Service, saying there remained doubts whether the government will submit to conditions for aid from the International Monetary Fund and European Union.

“Clearly the main risk is if the government fails to agree with the IMF/EU on the legal changes,” Simon Quijano-Evans, a London-based economist at ING Groep NV, wrote in e-mailed comments.

Hungary’s bonds and the forint rallied earlier today as Prime Minister Viktor Orban pledged to cooperate with central bank President Andras Simor after a dispute about the bank’s independence threatened the country’s bailout.

Hungary’s currency advanced 0.9 percent to 316.2 against the euro at 5 p.m. in Budapest, paring its weekly loss to 0.4 percent.

Fitch lowered Hungary’s foreign-currency debt to BB+, a step below investment grade, and reduced its forint debt to BBB-from BBB, the company said in a statement from London today. The outlook on the rating is negative, signaling the possibility of another cut.

Forced Selling

The third downgrade to junk may lead to “some forced selling” by funds with rating requirements “but that will only be of small size,” Peter Attard Montalto, a London-based economist at Nomura International Plc, said by email.

“Further downgrades can come we think if the negotiations for a backstop drag on for too long and cash levels are run down,” Montalto wrote. “Given how stressed the bond market is with people waiting for someone else to move first, it is a tinder box that could be lit by even a small amount of forced selling now.”

It’s in Hungary’s interest to get an IMF agreement “as soon as possible” and there’s a “good chance” for swift talks, Orban told reporters in Budapest after meeting with Simor today. The government will hold daily consultations with the central bank and do “everything” to help the institution maintain economic stability, Orban said.

Default Risk

The cost of insuring Hungary’s debt through credit-default swaps reached an all-time high this week and the forint touched a record low against the euro after aid negotiations with the IMF and the EU broke off because of new laws that threaten to undermine the central bank’s independence.

The default-swap contracts fell to 698 basis points today from 735 basis points yesterday, the highest close on record, according to data provider CMA.

The benchmark BUX stock index fell 0.7 percent, extending its weekly retreat to 5.1 percent, as OTP Bank Nyrt., the country’s biggest lender, declined 0.5 percent and Mol Nyrt., the biggest refiner, dropped 1.2 percent.

The government yesterday sold 35 billion forint ($140 million) of one-year bills, 10 billion forint less than targeted, data from the Debt Management Agency on Bloomberg show. The average yield rose to 9.96 percent, the highest since April 2009, from 7.91 percent at the last sale of the same-maturity debt on Dec. 22.

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