S&P cuts Hungary's debt to junk amid IMF row
Updated: 2011-12-23 08:07
BUDAPEST, Hungary - Hungarian Prime Minister Viktor Orban's drive to consolidate his power at the cost of delaying an International Monetary Fund (IMF) bailout triggered a debt downgrade to junk at Standard and Poor's (S&P), the second in a month.
The country's sovereign credit ratings were cut one step to BB+ from BBB-, Standard and Poor's said on Wednesday in a statement. S&P, which awarded Hungary its investment grade in 1996, assigned a negative outlook.
Moody's Investors Service lowered its assessment to Ba1, the highest junk grade, on Nov 24, while Fitch Ratings has assigned its lowest investment grade, BBB-.
"S&P didn't wait for the conclusions of the negotiations with the IMF on a new program as a sign that the policy backdrop has deteriorated substantially," Benoit Anne, the London-based head of emerging-markets strategy at Societe Generale SA, said on Thursday by e-mail.
"We have serious doubts that formal discussions on a new program will be initiated in January."
The forint has lost 13 percent since June 30, the worst performance among more than 170 currencies tracked by Bloomberg.
It fell to a record against the euro and the government struggled to meet its targets at debt auctions before the Moody's downgrade.
Hungary's five-year credit-default swaps, which measure the cost of insuring government debt against non-payment, traded at 572 basis points on Wednesday, the ninth-highest in the world, according to data provider CMA.
The central bank raised its benchmark interest rate to 7 percent on Tuesday from 6.5 percent, which was already the EU's highest.
Policymakers said they may boost borrowing costs further if risk perception and the inflation outlook deteriorate "substantially".
The government last month asked for IMF aid to ensure debt financing next year as yields soared and S&P signaled its looming downgrade.
The Cabinet is aiming for an agreement in the first few months of next year. The country is ready of "unconditional talks", Tamas Fellegi, the minister in charge of the talks, said last Friday.
"We believe S&P's move may be followed by Fitch, and rating downgrades are likely to intensify pressure on the government to make the required amendments to the constitution," Eszter Gargyan, a Budapest-based economist at Citigroup Inc, said.
"Even if talks are delayed until spring 2012, the government is likely to be pushed into a position where it has to accept conditionality following tough talks with the IMF and the EU."
Orban shunned IMF aid after taking office last year to protect what he called "unorthodox" measures from oversight, which failed to boost growth or put debt-reduction on a sustainable path as promised.
Hungary will have the highest debt level and slowest economic growth among the EU's eastern members next year, the European Commission forecast on Nov 10.