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Move towards EU talks

Fitch Ratings called the European Commission's go-ahead on Wednesday for talks with Hungary on precautionary financial assistance it is seeking from the International Monetary Fund and the European Union "positive" but said it still had concerns about the country in a statement published on Thursday.

Fitch said the news of the Commission's decision would not change its "negative outlook" on Hungary's sovereign rating.

"The European Commission’s announcement that it will start financial aid talks with Hungary is positive. Nonetheless, the process of securing assistance will be uncertain and the news does not negate our long-term concerns relating to the country," Fitch Ratings said.

"Appropriate and timely aid would lower fiscal and external financing risks. This would be positive for Hungary, easing one potential source of downward pressure on the country’s rating," it added.

Although negotiations are set to go ahead, the Commission has made it clear that it will closely monitor Hungary's adherence to its requests, Fitch Ratings said. It noted that the Commission was not pursuing legal action over an infringement procedure concerning the National Bank of Hungary's independence, but it had decided to petition the European Court of Justice on two other infringement procedures, concerning the independence of the country's data protection authority and the retirement age of judges. 

"Given that the dispute between Hungary and the EU has been going on for several months and the Hungarian government has often expressed an unwillingness to back down on key issues, negotiations could be lengthy and at risk of setbacks," Fitch Ratings said.

"The longer-term concerns we voiced when we downgraded Hungary to ‘BB+’ from ‘BBB-’ in early January have not gone away. These include Hungary’s exposure to the eurozone economy and eurozone banks, its high public and private indebtedness, policy unpredictability, and the scope for fiscal slippage," it added.

"Hungary’s rating could be lowered if timely assistance is not secured, or if we see a deeper-than-expected economic contraction, a material weakening in the government’s commitment to fiscal consolidation, or destabilizing unorthodox policy measures," Fitch Ratings said. "A positive rating action...would require the government to achieve tangible progress in meeting its fiscal and structural reform targets, as well as beginning in earnest to build a track record of policy predictability. We would also need to see an improvement in external financing conditions and a return to sustainable economic growth," it added.