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Moody's places Hungary under review for possible downgrade

Moody's Investors Service has today placed Hungary's Baa1 local and foreign currency government bond ratings on review for possible downgrade. The National Bank of Hungary (MNB) is also under review.

Moody's decision to initiate this review was prompted by the increased uncertainty regarding Hungary's fiscal outlook and economic prospects. This uncertainty is the result of the recent breakdown of Hungary's talks with the IMF and EU which in turn led to a suspension in the next disbursement from the IMF/EU €20 billion loan program for Hungary.

In a related rating action, Moody's also placed Hungary's Baa1 foreign currency bank deposit ceiling on review for possible downgrade. This ceiling reflects the risk that the Hungarian government would freeze foreign currency deposits to conserve scarce foreign currency resources during a crisis. The outlook on Hungary's Aa2 country ceiling for foreign currency debt remains stable. This is generally the highest rating attainable by an issuer of foreign currency debt domiciled in the country.

Moody's also placed the Baa1 foreign currency government bond rating of the National Bank of Hungary on review for possible downgrade.

While Moody's acknowledged the Hungarian economy's macroeconomic and fiscal adjustments (as reflected in current account and primary budget surpluses in 2009), the rating agency believes that the country's economy remains vulnerable because of the high foreign-currency indebtedness of both its private and public sector. Consequently, market confidence in both the government's fiscal consolidation program and the value of its currency are considered very important.

“The failed talks between the IMF/EU and Hungary's government about the country's loan program - which represents a crucial policy anchor for Hungary - has increased uncertainty about the authorities' determination to restore fiscal sustainability in the near term,” says Dietmar Hornung, a Moody's vice president - senior credit officer and lead analyst for Hungary. By espousing fiscal deficits above those recommended by the IMF and EU, Moody's believes that the Hungarian government has increased the uncertainty over whether its debt affordability will stabilize within the next two to three years.

Moody's also says that the suspension of talks with the IMF/EU is clouding Hungary's economic growth prospects by exerting downward pressure on its currency and upward pressure on funding costs. The rating agency believes that the MNB may be forced to raise policy interest rates out of concern over the impact of exchange rate depreciation on the foreign debt-servicing costs of both public and private sector borrowers. For the MNB, this issue would likely outweigh concerns that higher interest rates might restrain economic growth.

In addition, Moody's says that the government's bank levy represents a further potential drag on economic activity as it could negatively affect banks' credit provisioning and the country's investment
climate. The levy could also prompt foreign banks to scale back their Hungarian operations. (BBJ)