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Moody's downgrades Hungary two notches to Baa3

Moody's Investors Service said it downgraded Hungary's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1.

Moody's left the outlook on the ratings at negative. “The negative outlook reflects the uncertainties regarding the government's financial strength, as the country's structural budget deficit is set to increase and external vulnerabilities make the country susceptible to event risk,” Moody's said.

Moody's said the main reasons for the downgrades were “increased concerns about the country's medium- to long-term fiscal sustainability and higher external vulnerabilities than most of Hungary's rated peers.”

Moody's also downgraded Hungary's country ceiling for the foreign-currency debt by two notches to A1 from Aa2, and the country ceiling for foreign-currency bank deposits to Baa3 from Baa1. The local-currency ceilings for bonds and bank deposits were downgraded by three notches to Aa3 from Aaa.

In a related rating action, Moody's downgraded the National Bank of Hungary's (MNB) foreign-currency debt rating to Baa3 from Baa1 given that the Republic of Hungary is legally responsible for the payments on MNB's bonds.

“Today's downgrade is primarily driven by the Hungarian government's gradual but significant loss of financial strength, as the government's strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies,” said Dietmar Hornung, a Moody's Vice President -- Senior Credit Officer and lead analyst for Hungary. “As a consequence, the country's structural budget deficit is set to deteriorate.”

Moody's cited “crisis taxes” on the energy, retail, telecommunications and banking sectors as well as a government decision to suspend payments to private pension funds among the temporary measures recently introduced by the government.

“Today's rating action also reflects Hungary's high external vulnerability as the absence of more permanent fiscal consolidation poses heightened risks to medium- to long-term fiscal sustainability. In addition, the government, banking system and private sector each carry substantial external debt. Hungary's levels of external debt are high relative to those of its rated peers, especially non-European ones. The government also depends on purchases of its debt issuance by non-resident investors, implying that the maintenance of confidence among foreign investors is vital,” Moody's said.

Moody's noted among Hungary's strengths its “significant level of economic and financial integration with Europe”, recently announced FDI projects, the availability of “substantial external support” such as the country's financial support package from the IMF and EU in 2008, and the country's high share of foreign-owned banks.

Moody's said it could downgrade Hungary's sovereign rating again “if the government fails to stabilize its financial strength”, warning that this could be complicated by increased risk aversion among investors reflected in exchange rate pressures or rising financing costs. “The outlook on the government's Baa3 bond ratings could move to stable, and the ratings could eventually be upgraded, if the country embarks on a sustainable consolidation path -- possibly supported by assumption of robust economic growth -- that stabilizes government financial strength on a sustained basis,” Moody's said.

Moody's placed Hungary's rating on review for possible downgrade on July 23, 2010. Moody's downgraded the country's sovereign rating previously on March 31, 2009, knocking it down to Baa1 from A3. (MTI – Econews)