Hungary decries ratings downgrade, cuts 2012 outlook
Nov 25, 2011, 20:07 GMT
Budapest - Hungary reacted angrily Friday to the news that the credit rating agency Moody's had downgraded the country's bonds to 'junk' status, with the government describing it as a groundless attack on the country's finances.
'As there is no real grounds for Moody's evaluation, the government can only consider it as part of a series of financial attacks against Hungary,' the Economy Ministry said.
Moody's cited 'rising uncertainty' over the country's ability to meet fiscal consolidation and debt reduction targets as one reason for its decision.
However, Hungary argued that it was set to bring its budget deficit within the European Union's official limit of 3 per cent of gross domestic product (GDP) this year.
But that looked to be an increasingly difficult goal after Hungarian officials later announced that Budapest was ratcheting back its 2012 GDP growth projections, from 1.5 per cent growth to a range between 0.5 and 1.0 per cent.
Economics Minister Gyorgy Matolcsy said the earlier 1.5-per-cent estimate was 'not realistic' after a late Friday evening meeting with Prime Minister Viktor Orban and economic experts.
With its sovereign debt rated as 'non-investment grade' by one of the big three international ratings agencies, Hungary could find it difficult to raise on the open market the funds it needs to roll over a substantial national debt.
Hungarian 10-year bonds came under pressure following the announcement, touching yields of 9.9 per cent at times, their highest level since 2009.
The overnight downgrade comes despite an embarrassing policy U-turn that saw the government request financial assistance from the International Monetary Fund and the European Union on Monday.
Orban had cut ties with the IMF - which put up the bulk of a 25-billion-dollar credit line to stave off a default on sovereign debt in late 2008 - shortly after his right-wing government took office in May last year.
He has since spoken repeatedly of a 'battle' to regain Hungary's 'economic autonomy' while his government has forced through measures such as a hefty levy on banks and 'crisis taxes' on profitable business sectors.
Using the proceeds of a de facto nationalization of formerly compulsory private pension funds, Hungary managed to cut its national debt from 82 to 76 per cent of GDP this year, with the figure proudly displayed by a 'debt-o-meter' on the Economy Ministry's website.
However, Hungary's central bank reported this month that the debt-to-GDP ratio had returned to 82 per cent in the third quarter of this year, chiefly due to a weakening Hungarian forint.
Moody's reflected the concerns of banks and investors in the explanation for its downgrade of Hungarian bonds.
'Reliance on one-off measures to date, such as the liquidation of pension funds assets, will not improve debt sustainably in the long term,' the New York-based firm said.
Since September, banks operating in Hungary have been hit with further losses as borrowers sign up for a programme that allows them to pay off foreign currency mortgages at artificial exchange rates specified in government legislation.
The request on Monday for IMF assistance was clearly aimed at combating falling confidence in Hungary's economy after two other agencies - Standard & Poor's and Fitch - warned of a possible downgrade.
The Hungarian forint firmed against the euro, the Budapest stock exchange rallied and bond yields fell in response to the move - but these gains were largely wiped out Friday as the markets reacted to the news of Moody's downgrade.
Analysts are now expecting the central bank to hike its base rate from 6 per cent next week in a bid to stave off further devaluation of the forint.