Hungary's prime minister designate pledged bold action to drag the country out of its deepest recession in almost two decades, but S&P cut its credit rating to one notch above junk, citing a grim outlook.
Non-partisan Economy Minister Gordon Bajnai is set to take over from Prime Minister Ferenc Gyurcsány in April. The liberal SzDSz, who quit the ruling coalition with the socialists (MSzP) a year ago, gave him their backing overnight.
The deal follows a week of political haggling and may end the threat of early elections. Bajnai was quick to assure markets on Monday he would take immediate and painful measures to revive the central European country's ailing economy.
“Hungary is threatened by the economic crisis. This also means that Hungary has no time to waste,” Bajnai told a news conference. “Every week wasted...could cost the country hundreds of billions (of forints) and tens of thousands of jobs.”
Hungary secured a lifeline in the form of a $25.1 billion IMF-led package in October and most economists say the new government must be ready for more belt-tightening because its latest forecast of a 3.5% contraction in GDP this year looks optimistic.
The ratings agency S&P cut Hungary's long-term foreign and local currency ratings on Monday to “BBB-“ with a negative outlook from “BBB,” and said its economy could contract by 6% this year and a further 1 percent in 2010.
“The downgrade reflects an ongoing deterioration in key Hungarian economic and fiscal indicators,” said S&P's credit analyst Kai Stukenbrock.
News of the downgrade sent the forint sharply lower, hitting a session low of 315 to the euro, close to a record low of 317.45 earlier this month. Later on Monday, the forint had recovered to 311.00 per euro.
S&P said the risk of government revenues falling short of target because of the economic downturn put added strain on public finances, and the size of Hungary's public sector and still relatively generous social system had yet to be addressed.
It said prolonged political paralysis could lead to a further ratings downgrade.
Local media reported that Bajnai, who did not outline plans on Monday, would cut social benefits and pensions by HUF 600 billion ($2.58 billion) next year, scrap household gas price subsidies and curb child care allowances.
The news agency MTI cited MSzP parliamentary group leader Ildikó Lendvai as saying the party supported Bajnai's nomination on Sunday in full knowledge of that proposal.
“This is the minimum scenario that Hungary could realistically come forward with, anything less than this would have grave consequences,” Zoltán Török at Raiffeisen Bank said.
“Hungary will still have a budget deficit, but with a few hundred billion forints cut from social expenditures, it will not overshoot the (3% of GDP) deficit target,” he said.
Török also said big structural changes looked unlikely while the risk remained that parliament could withdraw its backing from Bajnai's belt-tightening program.
Others said a government without party stalwarts could still be strong enough to carry out its program as the allied parties did not want early elections and Gyurcsány's departure leaves the socialists in disarray.
On Monday the Budget Council, set up to monitor budget trends, warned Hungary it might need another financial aid package from the IMF when the current one expires next year.
Hungary has managed to sell government bonds just once since the market seized up in October and S&P said the IMF package provided significant but finite support for government funding.
“There is not much to gloss over. While I would not link (the downgrade) directly to politics, this is a clear warning to everyone that things are going in a very bad direction and that must be changed very quickly,” said Raiffeisen's Török. (Reuters)