The government’s proposal to allow households to repay their CHF-linked mortgages early at a discount exchange rate is “unlikely” to prompt rating agencies to “immediately” downgrade Hungary’s credit, but the downgrade risk is now “back in investors’ minds” following negative comments, London-based emerging markets analysts said on Wednesday.

In a comprehensive report released to investors in London, Barclays Capital said that while the desire to free the economy of its CHF debt burden is “understandable in principle”, the government’s “recent aggressive move” on the issue without consulting the MNB or banks “seems like a knee-jerk reaction”, similar to the “series of market-unfriendly measures” in the second half of last year.

The CHF conversion scheme may undermine foreign investors’ confidence and destabilize the foreign holdings in local bonds that have been rebuilt in the past year. Hungary’s C/A surplus may not be a high enough shield against a scenario of “sudden stop” in capital inflows. This suggests “we could revert to a situation where the central bank is persuaded to hike rates to provide additional premium against the rising risk of a weaker currency”.

At the beginning of September, “we perceived that Hungary could be in a position to cut interest rates if the disinflation trend continued and the Swiss National Bank’s actions to stabilize the CHF against the EUR were effective … (however) on our estimates, the probability of a rate cut (by Hungary’s central bank) has fallen to zero”, Barclays Capital said.

“We remind investors that Hungary currently has three BBB-/Baa3 ratings by the three major rating agencies with two negative outlooks by S&P and Moody’s”. Although immediate downgrades to speculative grade seem “somewhat unlikely to us”, recent negative comments by rating agencies “have certainly brought the risks of downgrades back into investors’ minds”.

Beyond the negative sentiment effect, a downgrade to speculative grade by two agencies would likely have negative technical effects: Hungary’s USD bonds are currently included in major US IG (investment grade) credit indices – such as the Barclays Capital US Credit index – and with two speculative grade ratings, Hungary bonds would have to drop out of these indices, eroding part of Hungary’s credit investor base, the report says.