Moody's cuts Hungary's ratings to A2 from A1

The outlook on the new ratings is stable. "While the rating action reflects our view that Hungary's sovereign creditworthiness has deteriorated at the margins, the country remains highly rated within the emerging market universe," said Moody's Vice President Jonathan Schiffer on Friday. "However, the fiscal austerity program of the current government, while admirable and long overdue, will likely fall short of its professed targets."

Unchanged by today's action was Hungary's Aa1 foreign currency country ceiling for debt, which is based on the government's bond ratings and Moody's assessment of a very low likelihood of a payments moratorium in the event of a government default. Also unchanged were the Aaa local currency country ceiling, the highest rating that can be assigned to any issuer domiciled in Hungary, and the country's local currency deposit ceiling, also Aaa. Hungary's short-term ratings for foreign and local currency government instruments remain unchanged at P-1.

Moody's said the next several years will see Hungary's macroeconomic performance subject to particularly close examination, with a risk of currency volatility and destabilizing capital flows. "Hungary has experienced such events at several junctures in the past few years, and the government is not likely to default on its debt obligations, nor is the largely foreign-owned banking system likely to experience a financial crisis," said Schiffer. "Overall, the banks have been performing well."

Schiffer said Hungary has a favorable debt maturity structure and a record of very capable and proactive debt service management by the Government Debt Management Agency. Nevertheless, the government's credit worthiness has declined due to its relatively high debt and external vulnerability ratios compared with its rating peers, signifying a slight deterioration in credit risk. Other negative factors, he said, include the country's poor record of meeting self-imposed fiscal targets, the effective postponement of the adoption of the euro into the next decade, and the potential economic contradictions and political pitfalls embedded in the multi-year life of the austerity program. (Mti-Eco)