(Adds forint in fifth paragraph, government reaction in sixth, debt crisis in seventh, policies in ninth.)

Nov. 12 (Bloomberg) -- Hungary’s sovereign credit grade may be cut to junk this month after Standard & Poor’s Ratings Services placed the country’s lowest investment grade on “CreditWatch with negative implications.”

S&P is likely to make a decision this month on Hungary’s credit grade, currently at BBB-, the rating company said in a statement today. Fitch Ratings yesterday cut the outlook on Hungary’s lowest investment grade to negative from stable, joining S&P and Moody’s Investors Service.

Hungary’s “unpredictable” policies, including the dismantling of checks on policies, levying of extraordinary industry taxes and forcing lenders to swallow exchange-rate losses on loans, are harming investment and growth at a time when the economic environment is deteriorating, S&P said.

“A more unpredictable policy environment, stemming from a weakening of oversight institutions and some budgetary revenue decisions, will have a negative effect on economic growth and government finances,” S&P said. “Downside risks to Hungary’s creditworthiness are increasing as the external financial and economic environment is weakening.”

Debt Financing

Hungary cut its offer of Treasury bills Nov. 10 as yields rose to a two-year high and the forint tumbled to the weakest in 2 1/2 years, raising concern the government won’t be able to finance the highest public debt level among the European Union’s eastern members. Investors are shunning risky assets while European leaders seek a solution to the region’s debt crisis and try to prevent it from spreading to weaker economies.

In 2008, Hungary got an International Monetary Fund-led bailout in 2008 to avoid default. Prime Minister Viktor Orban rejected renewing the IMF loan after winning elections last year, saying he wanted more freedom to pursue “unorthodox” policies aimed at cutting Hungary’s debt level while trying to meet a campaign pledge to end years of austerity measures.

“There is no real reason for Hungary’s downgrade,” Peter Szijjarto, Orban’s spokesman, said in an e-mailed statement today, citing plans to reduce the budget deficit and public debt levels in 2012.

Unorthodox Policies

The steps included raising revenue by effectively nationalizing $14 billion of assets held by private-pension funds, levying extraordinary taxes on the banking, energy, retail and telecommunication industries and forcing banks to swallow exchange-rate losses on foreign-currency mortgages.

To protect the policies from oversight, the Constitutional Court was stripped of its right to rule in most economic issues. An independent Fiscal Council was dismantled and a new one set up dominated by Orban’s allies.

“These measures will constrain growth prospects and may put the government’s fiscal targets in jeopardy and could prevent a sustained reduction in general government debt levels,” S&P said. “The risks are further amplified by what we consider to be weakening institutional effectiveness, which has been undermined by changes to the constitution and the functioning of some independent institutions.”

Orban has argued that the policies are needed to cut debt, which stood at 81 percent of gross domestic product at the end of last year. Hungary can also reduce its budget deficit to 2.5 percent of GDP next year, below the EU’s 3 percent limit, the Economy Ministry said in a statement yesterday. The Cabinet forecasts 1.5 percent growth next year, compared with the central bank’s 0.6 percent estimate.

The government is complementing its policies with spending cuts and tax increases to meet its budget goals. The Cabinet has announced plans to cut spending by as much as $4 billion a year by 2013. The government also plans to raise taxes, including the value-added tax and excise taxes.

--Editors: John Buckley, Amanda Jordan

To contact the reporter on this story: Kevin Costelloe in Brussels at kcostelloe@bloomberg.net Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Vivek Shankar at vshankar3@bloomberg.net