LEAD: Fitch downgrades Hungary bonds to junk, joining Moody's, S&P

Jan 6, 2012, 16:27 GMT

Budapest - Fitch, the third of the three major international ratings agencies, on Friday downgraded Hungarian debt to junk status.

The statement from Fitch said that debt issued by the Hungarian government would only be rated BB+, down from BBB-. That officially ranks Hungarian bonds as junk, meaning the government was at risk of default.

Similar downgrades have already been made by Standard & Poor's and Moody's.

Fitch also said it had a 'negative' outlook for Hungary's future economic growth, signalling that the country's debt could slide further into junk territory in the coming months.

'The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence,' said Matteo Napolitano, director of Fitch's Sovereign Group.

Hungary's government expressed surprise at the decision, noting that its currency, the forint, has recently stabilized after a sharp fall and that rates for credit default swaps had improved.

Hungary has been struggling with a weakening economy for years, a problem exacerbated by the previous government's tweaking of economic data and the current government's go-it-alone approach, shunning outside aid even as it raised taxes that hurt growth.

Prime Minister Viktor Orban has recently changed his tune, with an official request for European Union and International Monetary Fund assistance.

But a series of legislative changes, including one that could affect the independence of the central bank, have made international groups wary of lending.

Fitch noted that those concerns were making the likelihood of the needed EU/IMF loan less likely.

In Brussels, a spokesman said the European Commission would 'soon' complete its review of the central bank law and could demand changes before approving aid to Hungary.

The European People Party (EPP) - the conservative pan-European grouping of which Hungary's ruling Fidesz party is a member - urged Orban to avoid confrontation on the issue.

'We are confident that (he will) work closely with the leadership of the commission to assure that the legislation complies with EU law and, if necessary, to make modifications,' EPP leaders Wilfried Martens and Joseph Daul said in a joint statement.