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S&P downgrade raises pressure on gov’t to come to agreement with IMF/EU, analysts say

Both MKB Bank analyst Zsolt Kondrat and CIB Bank analyst Gyorgy Barta told MTI on Thursday that the Wednesday-evening Standard and Poor’s downgrade of Hungary’s long-term credit rating to junk status has increased pressure on the government to come to an agreement with the International Monetary Fund (IMF) and the European Union (EU) regarding a financial-support package.

Mr Kondrat remarked that S&P’s downgrade is unlikely to exercise any significant direct impact on markets since the most important issue with regard to Hungary is the success of the country’s u%oming talks with the IMF and EU.

Unsuccesful negiotiatons with the EU and the IMF could magnify the market impact, leading to a sharp depreciation of the forint and a sharp rise in yields which may trigger another rate rise.

Referring to the Moody’s downgrade of Hungary’s long-term credit rating to junk status at the end of November, Mr Kondrat noted that a second such downgrade usually prompts fund managers and pension funds to sell. He added, however, that there is no pressure to sell immediately, especially as a large part of Hungarian government securities is thought to be held one single investors.

Mr Kondrat said that the government’s recent actions with regard to the central bank law and its elimination of private pension funds suggest that it is not moving in the direction of concluding an agreement with the IMF/EU.

Mr Barta told MTI that the S&P downgrade has increased the likelihood that Fitch will follow suit even before a possible agreement between Hungary and the IMF/EU.

The CIB analyst added that he does not expect the downgrade to prompt the National Bank of Hungary (MNB) to conduct an extraordinary rate hike, adding that the market had already priced in the consequences of the downgrade.

Mr Barta cautioned that if the government implements its current plans with regard to the MNB it will raise Hungary’s CDS spreads even higher than they are now.