Fitch Ratings downgrades Hungary's credit rating to junk status, citing standoff between government and international lenders over possible rescue loans

Cindy Allen

BUDAPEST, Hungary , January 6, 2012 (Associated Press) – Fitch downgraded Hungary's credit rating to junk status on Friday, citing a standoff between the government and international lenders like the IMF and the European Union over possible rescue loans.

Fitch kept a negative outlook on Hungary, indicating a more than a 50 percent chance for another downgrade on the Central European nation of 10 million people within the next two years. The move followed similar action from Moody's and Standards & Poor's.

Hungary's shaky finances have been battered this entire week. Its currency, the forint, fell to all-time lows during two consecutive days and the government suffered through a rough bond auction Thursday in which the interest rates it had to paid to borrow jumped more than 2 percentage points in just a few weeks.

Investors are deeply unsure about the government's economic policies and whether it can agree upon a rescue loan with the International Monetary Fund.

Fitch Ratings' decision to cut Hungary's credit rating one notch, to BB+ from BBB-, was triggered partly "by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF-EU deal," said Matteo Napolitano, Director in Fitch's Sovereign Group.

Hungary late last year requested financial aid from the EU and the IMF. But the two institutions broke off preliminary negotiations in December amid concerns over new laws that hurt the independence of Hungary's central bank.

"Even if a (loan) agreement were to be reached, doubts would remain over whether the Hungarian government could submit to its strict conditionality, given its track record of policy unpredictability," Fitch said.

Government spokesman Andras Giro-Szasz said the downgrade was "surprising" considering statements from Prime Minister Viktor Orban and Tamas Fellegi, Hungary's chief financial negotiator, confirming the country's intention to soon reach an agreement with international creditors and affirming its support for the independence of the central bank.

Earlier Friday, Orban met with National Bank of Hungary President Andras Simor and the government's top economic officials. Orban dismissed market speculation that his conservative government was planning to raid central bank reserves to prop up the state budget and said it would do everything it can to support the central bank's efforts to stabilize the economy.

On Friday, the forint strengthened to around 215 per euro after falling as low as 224 per euro on Thursday.

Despite government pledges, investors are wary of government policies that boost budget revenues without unpopular austerity measures — such as windfall taxes on banks, telecommunications firms and others. They are also unnerved by Hungary's new constitution and new laws that have centralized political power and eroded democratic checks and balances.

Hungary has also been deeply affected by the eurozone's debt crisis — nearly 80 percent of its exports go to EU countries. Its domestic consumption has been weakened by high levels of household debt, including many mortgages held in soaring Swiss francs.

Many experts see the country falling back into a recession this year, though not as deeply as the 6.7 percent contraction in 2009.

Hungary was given a bailout of euro20 billion ($26 billion) in 2008 after the collapse of U.S. investment bank Lehman Brothers. Yet Orban, whose Fidesz party gained a two-thirds majority in parliament in April 2010 elections, chose to end the deal so IMF would not oversee Hungary's economic policy.

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