Bloomberg News

Hungary’s Outlook Cut to Negative by Fitch on Contagion

November 13, 2011

(Updates with forint in fourth paragraph, analyst comment in eight and final.)

Nov. 11 (Bloomberg) -- Hungary’s credit-rating outlook was cut to negative by Fitch Ratings on a worsening outlook for exports and external financing, indicating the rating company is more inclined to lower the grade to junk.

Fitch affirmed the country’s rating at BBB-, its lowest investment grade, the company said in a statement today in London. The debt evaluator joins Standard & Poor’s and Moody’s Investors Service in threatening to reduce Hungary to non- investment level.

Hungary cut its offer of Treasury bills yesterday as yields rose to a two-year high and the forint tumbled to the weakest in 2 1/2 years, amplifying concern the government won’t be able to finance the biggest public debt among the European Union’s eastern members. The nation needed an International Monetary Fund-led bailout in 2008 when its debt market froze as investors shunned riskier assets.

The decision “reflects a sharp deterioration in the external growth and financing environment facing Hungary’s small, open and relatively heavily indebted economy,” Matteo Napolitano, a director in Fitch’s sovereign ratings department, said in the statement.

Forint Decline

The forint dropped for a fourth week against the euro, declining yesterday to 315.47, two forint shy of a record low of 317.23 in March 2009. It has plunged 12 percent in the past three months, the second-worst performance among more than 170 currencies tracked by Bloomberg after the Swiss franc.

The yield on the benchmark five-year government bond rose to 8.099 percent at close from 8.089 percent yesterday, reaching its highest since Jan. 10.

The forint pared earlier gains against after the outlook cut. It was up 0.8 percent to 310.42 versus the euro at 7:12 p.m. in Budapest, after climbing 1.2 percent earlier in the day. The currency has extended declines since Economy Minister Gyorgy Matolcsy on Oct. 26 said it’s a “real threat” that one of the rating companies will cut the country’s sovereign-credit grade to junk.

“This would line them up to downgrade Hungary to junk in summer next year,” Peter Attard Montalto, an economist at Nomura Plc, said in a telephone interview today. “At that time, financial stability will probably be in a much worse situation than now, given extra government policy moves. It will really be crunch time for the budget as well.”

Bank Tax, Mortgages

Economic growth slowing more than expected, private capital outflows or “problems in the banking sector,” a rise in risk premium or fiscal financing pressure may lead to a ratings downgrade, according to Fitch, adding that a “material weakening” in the government’s commitment to fiscal consolidation may also be grounds for a cut.

A bank tax imposed last year and a government plan forcing lenders to absorb exchange-rate losses on foreign-currency mortgages have restrained credit and hurt growth, according to the central bank.

“Various fiscal policy measures and the scheme to allow the repayment of household foreign-currency mortgages at below market exchange rates have dented foreign investor confidence, on which medium-term growth prospects depend,” Fitch said.

Hungary’s economic growth prospects are under pressure as the euro region, its main export market, is slowing as it struggles to contain its debt crisis. The European Commission yesterday cut its forecast for Hungary’s 2012 economic growth to 0.5 percent, a third of what the government assumed in its draft budget. Fitch sees the economy growing 0.5 percent in 2012, down from their earlier projection of 3.2 percent.

Government Disagrees

The government disagrees with Fitch’s assessment as it will be able to meet its target of reducing the budget deficit to 2.5 percent of gross domestic product next year, the Economy Ministry said in an e-mailed statement today, adding that the Cabinet is “doing everything” to reduce public debt.

“The government is certain that early next year, when the final data for this year’s budget balance and mortgage repayment will be known, with that information, Fitch Ratings will also review its current, overly pessimistic evaluation and will adjust its opinion in a positive direction,” it said.

The government meeting its deficit targets and a return to “healthy growth, particularly in the context of significant structural reforms and declining external debt ratios,” may lead to “positive rating action,” Fitch said.

The cost of ensuring against a non-payment on Hungary’s 5- year bonds with credit-default swaps fell to 567 basis points from 570 at yesterday’s close, which was within 3 basis points of the 2 1/2-year high reached on Oct. 4, according to CMA data.

“This rating outlook action makes me even more bearish on Hungary,” Benoit Anne, head of emerging markets strategy at Societe Generale SA in London, wrote by e-mail. “Hungary is the epitome of contagion risks, with its poor fundamentals and the low credibility of economic and financial policies currently put in place by the authorities.”

--With assistance from Zoltan Simon in Budapest. Editors: Balazs Penz, Andrew Langley

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net


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