Hungary Is Still Junk to Swaps Traders as Fitch Reviews Rating

  • Fitch set to decide on Hungary's credit rating Friday
  • Moody's Analytics implied ratings suggest country still junk

As Fitch Ratings reviews Hungary for a promotion from junk, the verdict from derivatives traders is that the country may fall short of investment-grade credentials.

It costs 28 basis points more to insure Hungary’s bonds against default for five years than investment-grade rated Romania, while the level implied by credit-default swaps suggests the country deserves an even lower speculative score than the one it has, according to Moody’s Analytics. Aberdeen Asset Management Plc said Hungary may not be ready to rejoin the club of high-grade sovereigns, four years after state encroachment on the free market led all three ratings firms to cut it to at least one step below the threshold.

There’s growing optimism that Hungary will make a comeback as its debt burden eases, economic expansion picks up and Prime Minister Viktor Orban pledges to scale back the European Union’s highest bank tax. Even so, Moody’s Investors Service stopped short of a full upgrade on Nov. 6, opting instead for a positive outlook on its Ba1 rating, awaiting evidence of "more stable" economic policy making. Fitch will announce its decision on Friday.

“Based on the economic and fiscal numbers only, Hungary deserves to be investment grade," said Viktor Szabo, a money manager overseeing $12 billion of emerging-market debt at Aberdeen in London, who has an underweight stance on Hungarian bonds. “But if you look behind those numbers you’ll see a different picture. My biggest concern is institutional weakness and a lack of checks and balances."

Government Policy

Orban shook the confidence of investors when he raised corporate taxes in 2010 and seized pension-fund assets the following year to prop up state finances, sending yields on sovereign euro-denominated debt to as high as 9.71 percent in 2012 and wiping out as much as $24 billion from the nation’s equity market. The rate on those bonds, which come due in February 2020, has since fallen to 1.16 percent, while the Budapest Stock Exchange Index rallied 39 percent in 2015.

Hungary’s five-year CDS contracts have fallen six basis points this month to a three-month low of 157, a level that’s below seven out of nine nations that hold Fitch’s lowest investment grade, according to data compiled by Bloomberg. Still, the rating implied by CDS was Ba2 as of Nov. 18, one level lower than Moody’s Analytic’s actual score.

Hungary’s Economy Minister Mihaly Varga said in comments to state-run M1 television on Friday that he was "not anticipating" Fitch to lift the nation’s rating.

‘Less Predictable’

Investors have largely shrugged off downgrades, reflecting a shift to a focus on in-house analysis from reliance on ratings companies. Since France first lost its AAA rating from Standard & Poor’s in January 2012, the yield on the country’s benchmark 10-year government bond has dropped to about 1 percent from more than 3 percent.

In September, S&P affirmed Hungary at BB+, saying that while the economy was recovering, growth rates were slower than peers and the policy-making environment remained "less predictable."

An upgrade would be considered "if the government pursued policies that encourage investment and promote sustainable growth, such that risks to its balance sheet and Hungary’s monetary conditions eased," S&P said.

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