Hungary CDS Climbs to Five-Month High as S&P Cuts Rating Outlook

Hungary’s bond risk rose to the highest in five months and the forint headed for the longest series of weekly declines in almost 18 months as Standard & Poor’s cut the outlook on Hungary credit rating to negative.

The cost to insure Hungary’s debt with credit-default swaps rose for a second day after S&P said the government’s takeover of central bank management and changes to the constitution may harm policy makers’ credibility, according to a statement late yesterday. The company kept the rating at BB, two steps below investment grade. S&P’s criticism may be replicated by other rating companies, said Luis Costa, a London-based strategist at Citigroup Inc.

“I consider this change of outlook as the opening of one more important dimension in Hungarian risk,” Costa wrote in an e-mail today. “We still favor a higher euro-forint rate.”

The CDS contracts rose 24 basis points to 372, the highest since Oct 5. The currency of Hungary, the most indebted nation in the east of the European Union, slid as much as 0.5 percent and was little changed at 306.82 per euro by 4:03 p.m. in Budapest, extending its decline in the past five days to 0.5 percent. The forint depreciated for a sixth week, the longest such streak since October 2011.

Moody’s Investors Service and Fitch Ratings both rate Hungary one step below investment grade, with negative and stable outlooks, respectively.

Yields on the government’s dollar-denominated bonds due in 2023 rose 10 basis points to 5.97 percent, the highest level since the securities were first sold on Feb. 12.

Policy Changes

Hungarian Prime Minister Viktor Orban used his party’s two-thirds majority in parliament to amend the constitution last week, overturning previous court decisions and limiting legal interpretations by judges. The forint has also weakened since Orban named former economy minister Gyorgy Matolcsy as central-bank president on March 1. Matolcsy, who in December advocated the use of “unorthodox” monetary policies to boost growth, started his tenure by taking away powers from two of his deputies appointed under a previous government and rewriting the bank’s founding document to consolidate authority in his hands.

The forint pared losses today after Magyar Hirlap reported that the government opposes weakening the forint, citing an interview with Peter Szijjarto, a state secretary at the prime minister’s office.

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