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More downgrades a risk, but Hungary “would not deserve junk”, says City

There is a risk of further downgrades next year, but Hungary does not deserve a “junk”, or non-investment, rating, London-based emerging markets analysts said on Monday.

In a report on emerging Europe's prospects for 2011 released to investors in London, Morgan Stanley said that Moody's two-notch downgrade of Hungary last week from Baa1 to Baa3, leaving Hungary's ratings just one notch above non-investment grade, did not come as a surprise, but the size of the move “definitely” did.

From the MNB's point of view, the downgrade “clearly vindicates” the central bank's recent decision to react to the rise in risk premia by raising its interest rates.

However, “we think the move by Moody's is possibly a little exaggerated, certainly its size is ... but it will be up to the government to come up with structural measures that will alleviate the rating agencies' fears”.

The question is how Standard & Poor's, “usually more negative on Hungary than Moody's”, will react: a downgrade by S&P would place Hungary in the non-investment grade category. “This is a distinct risk over the next months”, though the government has announced the publication of a structural reform program by February.

However, “it is not encouraging that there has been little follow-through on such announcements in the past”.

Overall, “we think it would be harsh if S&P downgraded (Hungary) to non-investment grade, but the possibility does exist”, Morgan Stanley said. (MTI-Econews)