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S&P maintains Hungary’s rating and negative outlook

Hungary had its credit rating maintained at BBB- with a negative outlook at Standard & Poor's because of risks in implementing the government’s budget plan. This means Hungary’s credit grade may be cut to junk if the government’s committment to implement policies weakens.

The grade and outlook of Standard & Poor's on Hungary matches that of Moody’s Investors Service and Fitch Ratings.

The government, which announced Széll Kálmán plan, a three-year plan to cut spending to avert a downgrade to junk and make up for a revenue shortfall after temporary business taxes run out after 2012, may only implement 60% of its spending cuts, S&P said. Along with the effective nationalization of private pension funds, that should be sufficient to stabilize the debt level, it added.

“The Hungarian government has announced an expenditure- focused reform plan, which it estimates will bring about a fiscal consolidation of more than 7% of GDP over 2012- 2014,” according to S&P. “We estimate that the government will achieve only 60 percent of this targeted fiscal adjustment.”

After S&P’s publishing its statement, the forint rallied to a six-week high against the euro, rising 0.6% to 267.70 against the euro as of 12:42 p.m. today.

Debt stabilization

The fiscal plan will probably stabilize the government debt level at 65% of gross domestic product “over the forecast horizon,” S&P said. Hungary’s debt level was 80% of GDP at the end of last year

Concerns were heightened after the government cut off funding last year to the Fiscal Council after the independent watchdog criticized budget policy. The government set up a new council dominated by allies of Prime Minister Viktor Orbán.

“The negative outlook on the ratings reflects our opinion that the government’s efforts to weaken the independence of key institutions, such as the Fiscal Council, present a risk to the overall quality of economic governance,” pointed out S&P. “As a result, we are concerned that the government may become less committed to the implementation of its reform plan.”


Hungary’s credit grade may be cut to junk if the government’s commitment to implement policies “weakens,” S&P said. This may become “apparent” if specific measures aren’t outlined, legislation isn’t implemented and policies aren’t in place by the end of this year, the rating agency said.

The credit outlook can be raised to “stable” if the government “proactively” addresses issues that are obstacles to growth and demonstrates that its budget plan will be fully implemented, S&P said.

The Széll Kálmán plan will be “fully implemented,” Mihály Varga, Prime Minister Viktor Orbán’s chief of staff, told reporters yesterday after S&P’s statement.