Moody's cuts Hungary's credit rating one notch to junk status, citing its lackluster growth, high debt burden; country's finance minister says move has 'no basis' because its economy has been improving

Cindy Allen

Cindy Allen

BUDAPEST, Hungary , November 25, 2011 () – Hungary has slammed Moody's decision to downgrade its credit rating to junk status, describing it Friday as another unjustified financial attack against the country.

Hungary, which last week asked the International Monetary Fund and the European Union for possible financial help, is feeling the fallout from the debt crisis in the 17-country eurozone, even though it does not use the euro. Its economy has not grown as much as hoped and its debt burden remains relatively high.

Late Thursday, Moody's, one of the three major international credit rating agencies, cut its view on Hungary's government bonds by one notch, from Baa3 to Ba1 and maintained its negative outlook. The move to junk status could mean that Hungary will find it increasingly difficult to borrow in money markets as well as having to pay a higher premium.

The country's finance ministry was furious at the decision.

"It has no basis because, despite all the external difficulties, in the past year and a half there has been an expressly favorable change in most areas of the Hungarian economy," the ministry said Friday.

Illustrating its point, the ministry mentioned Hungary's current account surplus, the falling budget deficit, a significant cut to state debt levels and economic growth, which exceeded the European Union average in the third quarter of the year.

Even without the downgrade, Hungary is going to have to confront a number of difficulties next year as many of the economies of the eurozone — the country's main export markets — look headed for a recession in the wake of the crippling debt crisis and doubts persist over the effectiveness of the government's economic policies.

The agency cited questions over the Hungarian government's ability to meet its debt reduction targets as well as the country's vulnerability to external shocks as reasons for the downgrade.

It also noted that foreign investors hold 64 percent of Hungary's bonds, of which two-thirds are denominated in foreign currencies. A weaker forint, Hungary's currency, makes it more expensive for the government to pay back its foreign-currency debts.

Moody's, which first awarded Hungary an investment-grade rating in 1996, said a further downgrade could come if "there is a significant decline in government financial strength due to a lack of progress on structural reforms. However, it said the rating could stabilize if there were "a more consistent implementation" of planned reforms.

The downgrade did not prove much of a surprise, though yields on Hungarian debt crept upward and the forint weakened against the euro. Early Friday, the forint fell to 316.60 per euro, 1.7 percent weaker than its opening rate.

Just hours before Moody's announcement, rival Standard and Poor's said it would wait for developments in upcoming talks between Hungary and the IMF and the EU before making a decision on the rating. S&P also has Hungary's rating on so-called "negative watch."

Last week, Hungary's government said it would seek a financial "safety net" from the IMF and the EU, but no new loans, in an effort to improve investor sentiment and protect itself against the spiraling eurozone debt crisis. In late 2008, Hungary became the first EU country to receive an IMF-led bailout, getting a euro20-billion standby loan to avoid defaulting on its debts.

The move marked a reverse in policy. Only last year, Prime Minister Viktor Orban decided to break away from the IMF, preferring instead to make Hungary finance itself. This blocked the IMF's direct influence on Hungary's economic policy and gave the government a free hand to experiment with unorthodox approaches.

To avoid unpopular austerity measures, the government introduced windfall taxes on the energy, banking and other sectors, nationalized some $14 billion in assets managed by private pension funds and allowed indebted households to repay mortgages in foreign currencies at exchanges rates far below market values.

"Hungary will have to accept any dictate the IMF may have, there is no room to negotiate," said analyst Gabor Ambrus of London's 4Cast after the Moody's announcement. "The government will have to make another U-turn."

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