Downgrade weighs on yields, could force accelerated reforms

A downgrade of Hungary’s sovereign rating to "junk" by Moody’s late Thursday is likely to raise government securities yields and could force the government to speed up reforms, analysts told MTI early Friday.

TakarekBank’s Gergely Suppan said the action by Moody’s will require the government to accelerate the pace at which legislation is produced supporting the Szell Kalman Plan, a structural reform programme unveiled in the spring. The debt crisis in the euro zone, which has a big influence on Hungary’s risk, played a role in Moody’s assessment, he added.

Zoltan Arokszallasi of Erste Bank said the downgrade came as a surprise, especially coming just hours after Standard and Poor’s said it postponed a possible ratings action on Hungary until more information is available on the likelihood of an agreement on financial assistance with the IMF and the EU. Hungarian government securities are already priced similarly to those issued by other countries with "junk" status, but the downgrade could make things worse, he added.

Currency traders said the forint could weaken to a new low on Friday because of the downgrade.

The forint’s historical low against the euro was 317.85, reached on November 14, 2011.

Yields on Hungarian government securities were up about 80bp from late Thursday, bond traders told MTI early Friday. Just a few small transactions are taking place on the stock exchange and the secondary market is practically at a standstill, with everyone on the selling side, they added.

The three-year yield was at 9.30%/9.10% and the five-year was at 9.70%/9.60% at little before 10am. Shortly afterward, the 2022/A benchmark was quoted at 9.65%/9.45%.

Emerging market economists at 4cast in London said the downgrade would most certainly mean a rate rise by the National Bank of Hungary. They project a 50bp rate rise.

NBH rate-setters will next take a decision on the central bank’s key rate, currently at 6.00%, on November 29.