Fitch downgrades Hungary to junk

Fitch Ratings on Friday said it downgraded long-term foreign and local currency Issuer Default Ratings (IDR) by one notch to ‘BB+’ and ‘BBB-’, from ‘BBB-’ and ‘BBB’, with a negative outlook.

Fitch also said it downgraded Hungary’s Short-term IDR to ‘B’ from ‘F3’, and its Country Ceiling by two notches, to ‘BBB’ from ‘A-’.

"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 and complicating the agreement of a new IMF/EU deal," said Matteo Napolitano, Director in Fitch’s Sovereign Group.

Fitch put Hungary’s ratings on Negative Outlook on November 11, 2011, citing a worse than anticipated economic slowdown, a rise in risk premiums and fiscal financing pressure.

"In the agency’s view these risks have materialised," Fitch said.

Fitch said the outlook for economic growth in Hungary is continuing to deteriorate and fiscal and external financing risks have "increased significantly" because of worsening investor sentiment. It cited the partial failure of a bond auction on December 29 and a reduction in an offer of twelve-month discount T-bills at an auction on January 5. Ten-year government securities yields are near 11%, up from 8% in early November, and the forint is down 2%, reaching a historical low in early January.

"Adverse moves in market sentiment towards Hungary have been greater than in central European peers such as Poland and Romania, highlighting its domestic problems as well as contagion from the eurozone debt crisis," Fitch said. "Additional unorthodox policy measures have further undermined confidence in policy making," it added,

The ruling majority incorporate most of the suggestions from the European Central Bank into the new Central Bank Act in December, but left in place provisions that "Fitch perceives to reduce the independence of the National Bank of Hungary", the rating agency said. Furthermore, the new constitution, in force from January 1 2012, subordinates changes to key tenets of economic policy, such as taxation, to a two-thirds parliamentary majority, thus reducing the scope for fiscal adjustment of future governments, it added.