Hungary Rating Outlook Cut to Negative by S&P on Policy Overhaul

Hungary’s credit-rating outlook was reduced to negative from stable by Standard & Poor’s, which cited concern that the government’s “interventionist” policies may harm growth and credibility.

Hungary’s long-term foreign-currency rating remained at BB, the second-highest non-investment grade, S&P said in a statement today. The negative outlook indicates a potential downgrade if a deterioration of policy framework weakens confidence and growth prospects or “significantly” raises financing costs and leaves Hungary exposed to diminished capital inflows, according to the statement.

“The predictability and credibility of Hungary’s policy framework has continued to weaken,” S&P said. “That’s partly due to policy decisions that, in our view, raise questions about the independence of oversight institutions and hence their credibility.”

Hungarian Prime Minister Viktor Orban used his party’s two-thirds majority in parliament to amend the constitution, overturning previous court decisions and limiting legal interpretations by judges. The measures previously had been shot down by the Constitutional Court and their entrenchment in the basic law sparked international criticism, including the European Union and the U.S.

The forint extended losses after S&P lowered the outlook, weakening 0.5 percent to 306.57 per euro by 6:52 p.m. It has lost 5.5 percent against Europe’s common currency in the past three months, the second-biggest decline among more than 20 emerging-market currencies tracked by Bloomberg, behind the the South African rand.

Bond Effect

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Hungary’s borrowing costs rose at a bond auction today on speculation unconventional methods to revive growth may be used by the government and the central bank, whose governor was replaced this month by Orban’s previous economy minister, Gyorgy Matolcsy.

The Debt Management Agency raised 60 billion forint ($254 million) in debt maturing in 2016, 2018, and 2023 at today’s sale, 15 billion forint more than planned. The issuance included 15 billion forint in bonds due 2023 at an average yield of 6.44 percent, compared with a rate of 6.3 percent at the last auction two weeks ago. Financing costs also rose for the two other maturities.

“Recent governance changes at the National Bank of Hungary and amendments to the constitution could undermine Hungary’s institutional effectiveness and the quality and predictability of policy making,” according to the statement.

Hungary’s BB rating puts it on par with Portugal, Macedonia and Guatemala.

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