Hungary `Isn't Greece,' Moody's Says Following Bond Tumble
Hungary has “a good track record” managing fiscal crises and will take the steps needed even after a government official said the country may be at risk of defaulting, according to Moody’s Investors Service.
“Hungary isn’t the next Greece,” Kristin Lindow, a senior vice president with the ratings company, said in a telephone interview yesterday from London. “Hungary has a good track record of doing what it needs to do when in trouble.”
Hungarian bonds tumbled yesterday, pushing up borrowing costs by the most since October 2008, and the forint and stocks plunged after Peter Szijjarto, spokesman for Prime Minister Viktor Orban, said it’s not “an exaggeration at all” to speculate that the nation may be unable to pay its debt.
The comments sparked concern that Europe’s debt crisis is spreading after credit downgrades of Greece, Portugal and Spain. The European Union pledged almost $1 trillion to the bloc’s weakest economies last month after Greece’s widening budget deficit threatened to undermine confidence in the euro.
“It’s clear that the economy is in a very grave situation,” Szijjarto said at a press conference in Budapest yesterday. “I don’t think it’s an exaggeration at all” to talk about a default, he said.
Orban took office May 29 after winning elections by pledging to cut taxes and stimulate the economy. He failed last week to get EU approval for looser fiscal policy.
‘Ill Considered’ Comments
The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 157 basis points, or 1.57 percentage point, to 476, according to JPMorgan Chase & Co.’s EMBI Global Index. The BUX Index of equities tumbled 3.3 percent, while the forint fell 2.3 percent to 288.73 per euro, the weakest level since June 2009.
“The politician was over-speaking, which is typical for a new government, but it was ill considered,” Lindow said. Moody’s lowered Hungary’s debt rating to Baa1, the third lowest investment grade, from A3 in March 2009 and has a negative outlook.
Hungary, the first EU nation to receive an international bailout during the credit crisis, has the equivalent of $26.9 billion of debt coming due this year, according to data compiled by Bloomberg.
The government’s budget deficit could grow to as high as 7.5 percent of gross domestic product this year, compared with a 3.8 percent target set with the International Monetary Fund by the previous government, Mihaly Varga, Orban’s chief of staff, told M1 television on May 30.
Orban is vowing to end austerity and cut taxes to help accelerate economic growth after the worst recession in 18 years. Former Hungarian Finance Minister Peter Oszko said yesterday the country is “in no way near default.”
“While the outlook for that country remains poor, it does not quite have the potential to roil markets as much as Greece or the other peripheral euro zone members,” Win Thin, a senior currency strategist at Brown Brothers Harriman & Co., said yesterday in a report. “The Hungary story is bad, but the overall impact is likely to be limited.”
Hungary, which received a 20 billion-euro ($24 billion) loan from the IMF, the EU and the World Bank in October 2008 to help avert a default, hasn’t drawn any funds from its standby program under the fourth and fifth previews, and the new government has raised the possibility of renegotiating this year’s deficit target to 5 to 6 percent of GDP, according to Thin.
“The new government is trying to say the picture is much uglier and we’re going to work to clean the house,” Luis Costa, an emerging market strategist at Citigroup Inc. in London, said yesterday in a phone interview. The comments “are probably more populist than anything else,” he said. “When it comes to the funding requirements, the situation in 2010 is still very manageable.”
Credit-default swaps on Hungarian government bonds rose to 410 basis points from yesterday’s close of 308, according to CMA DataVision prices. An increase signals deterioration in investor perceptions of credit quality.
“We still have a negative outlook because we don’t know when implementation will happen of the structural changes,” Moody’s Lindow said.
The BUX index briefly extended its drop from this year’s high to more than 20 percent yesterday before paring it loss.
The MSCI Emerging Markets Index of shares lost 1.2 percent yesterday, while currencies from Poland to Romania and Russia weakened against the dollar. The Standard & Poor’s 500 Index tumbled 3.4 percent as a report showing slower-than-estimated American job growth worsened losses sparked by concern over Hungary’s debt.
Hungary is in its fifth year of cost cutting and the government reduced the deficit to 4 percent of GDP last year from 9.3 percent in 2006, the EU’s widest at the time.
The country’s debt level may reach 79 percent of GDP this year, on par with Germany and making it the most indebted eastern EU member, according to the European Commission. The debt level is less than the 125 percent of GDP for Greece, 118 percent for Italy, and 86 percent for Portugal.
A fact-finding panel will probably present preliminary figures on the state of the economy this weekend, Szijjarto said. The government will publish an action plan within 72 hours after the committee reports its findings, he said.
“The moment of truth has already arrived in Greece and it has yet to come to Hungary,” Szijjarto said. “The government is prepared to avoid the road that Greece has been down; in other words, we won’t hesitate to act after the truth becomes known.”
Szijjarto’s comments “are extremely confusing and more market panic should be expected,” Elisabeth Andreew, chief foreign-currency strategist at Nordea Markets in Copenhagen, wrote in an e-mailed comment. “Beware of more spill-over effects on other currencies and asset classes.”