Hungary Credit Rating Cut to Junk at Moody’s

11/25/2011 09:22

Bloomberg:  Hungary must redouble efforts to obtain International Monetary Fund aid and the central bank should raise rates to ease financing risks after Moody’s Investors Service cut the country’s credit grade to junk, said fund managers from Budapest to London.

Prime Minister Viktor Orban, who shunned seeking an IMF loan since coming to power last year until the forint fell to a record against the euro this month, may need to accelerate talks with the Washington-based lender to bolster investor confidence, fund managers at Aegon Fund Management, Aberdeen Asset Management (ADN), and K&H Fund Management said.

“They’ll either have to strike a quick deal with the IMF or the market will force them to,” Viktor Szabo, a London-based portfolio manager at Aberdeen, who helps manage about $7 billion in emerging-market debt, said in a telephone interview. “Hungary may stay one of the worst-performing markets if Europe’s crisis continues.”

The government is seeking “insurance” from the IMF and the European Union that doesn’t entail a loan and doesn’t impose conditions on the economic policy. Orban wants to retain a “free hand” in economic policy, which included forcing banks to swallow exchange-rate losses on foreign-currency mortgages and levying extraordinary industry taxes.
Interest Rate Outlook

The central bank will probably raise the benchmark two-week deposit rate to 6.5 percent from 6 percent on Nov. 29, after holding the two-week deposit rate unchanged since January, according to the median estimate of 10 economists in a Bloomberg survey taken after the downgrade.

The yield on the benchmark five-year bond yields rose 89 basis points to 9.78 percent at 12:33 p.m. in Budapest, rising the most in two-and-a-half years.

The forint lost 1.2 percent to 315.12 against the euro, extending declines since the end of June to 14 percent, the worst among 31 major currencies tracked by Bloomberg. Credit- default swaps rose to 647.5 basis points, a record high.

Forward-rate agreements fixing three-month interest rates in one month jumped to 7.015 percent by 12:50 p.m. in Budapest from 6.74 percent yesterday. Three-month FRA rose to 7.68 percent from 7.13 percent. The three-month Budapest Interbank Offered Rate, to which the FRAs settle, traded at 6.64 percent, showing expectations for the main interest rate to rise to 7 percent by February from 6 percent now.
Payments Peaking

Hungary, which is seeking to reach an IMF agreement in the “first months” of next year, lost its investment-grade rating at Moody’s after 15 years as the debt evaluator cited risks to budget-deficit and public debt targets.

The foreign- and local-currency bond ratings were cut one step to Ba1 from Baa3, the company said in a statement yesterday. Moody’s assigned a negative outlook. The country is rated the lowest investment grade at Standard & Poor’s and Fitch Ratings.

Hungary’s foreign-currency debt maturing next year will soar to 1.37 trillion forint ($5.8 billion), a 48 percent increase from this year. That will rise to 1.48 trillion forint in 2013 and peak at 1.65 trillion forint in 2014 as Hungary repays the 20 billion-euro ($26.5 billion) bailout. Hungary had $51.3 billion in foreign-exchange reserves at the end of September, according to Bloomberg data.

“The downgrade is a signal to politicians that this IMF deal isn’t a game and things are turning serious,” Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest, said in a phone interview. “I expect the pace of negotiations with the IMF to accelerate.”
Yields Soar

Hungarian 10-year government bond yields rose 73 basis points to 9.56 percent, the highest since June 30, 2009, according to generic prices compiled by Bloomberg. That compares with 10-year yields near 12 percent for Portugal and more than 26 percent for Greece, according to generic prices compiled by Bloomberg.

Yields for similar-maturity bonds were at 6 percent for Poland and about 4 percent for the Czech Republic. German yields were traded for about 2 percent, data compiled by Bloomberg shows.

Premier Orban has relied on one-off measures, including the nationalization of $14 billion of mandatory private pension funds and extraordinary industry taxes to mask a swelling budget, whose deficit reached 193 percent of the Cabinet’s annual goal through October. The Cabinet’s plans to cut spending in the next three years face “rising uncertainty” as growth slows, Moody’s said.
‘Financial Attack’

“Since the decision by Moody’s has no realistic basis, the Hungarian government can only interpret this as being part of a financial attack against Hungary,” the Budapest-based Economy Ministry said in an e-mail today.

Hungary’s economy may expand 0.5 percent in 2012 as tax increases next year and spending cuts will probably slow growth, the European Commission, the EU’s executive arm, said on Nov. 10.

The debt level may drop to 75.9 percent of GDP this year from 81 percent last year because of one-off revenue from nationalized pension assets before rising to 76.5 percent next year, partly as a result of a weakening forint, the commission said. The government targets a budget gap of 2.5 of GDP in 2012.

Investors are shunning riskier bonds as Italy, which has a bigger debt load than Spain, Greece, Ireland and Portugal combined, struggles to ward off contagion from the euro area’s debt crisis that started in Greece more than two years ago and threatens to infect weaker economies.
‘Unorthodox’ Hungary

Portugal’s credit rating was cut to below investment grade by Fitch Ratings yesterday due to the country’s rising debt level and weakening economy.

The Hungarian government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened.

Hungary was the first EU member to obtain an IMF-led bailout in 2008. Since winning elections last year, Orban had rejected seeking IMF help, 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. Asking the IMF for help would be “a sign of weakness,” Economy Minister Gyorgy Matolcsy told Heti Valasz in its Oct. 27 issue.

“The first driver of today’s downgrade is the uncertainty surrounding the Hungarian government’s ability to meet its targets on fiscal consolidation and public-sector debt reduction,” Moody’s said in its statement. “Hungary’s recent requests for assistance from the IMF and the EU illustrate the funding challenges facing the country.”
Extraordinary Taxes

Orban’s steps included levying extraordinary taxes on the banking, energy, retail and telecommunication industries and forcing banks to swallow exchange-rate losses exceeding 40 percent on foreign-currency mortgages. Hungarian loan defaults are rising as borrowers struggle to repay foreign-currency mortgages, which account for more than two-thirds of housing loans, after a slump in the forint boosted repayments.

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.

The government is also carrying out spending cuts, reducing drug subsidies, and increasing taxes to meet budget goals. The Cabinet announced plans to cut outlays by as much as $4 billion a year by 2013. The government also plans to raise taxes next year, including the value-added tax and excises.
‘Down a Spiral’

“The downgrade is increasing uncertainty and it’s pushing Hungary further down a spiral,” Gyorgy Majoros, a fixed-income portfolio manager who helps manage $3.3 billion at K&H Asset Management, a unit of KBC Groep NV (KBC), said in a phone interview. “This isn’t going to stop until we have a clear break in policy and the government takes steps to stabilize the economy and boost investor confidence.”

S&P said yesterday it’s keeping Hungary’s sovereign-debt rating on “CreditWatch with negative implications” for longer than the one-month period it originally planned after the country approached the IMF for assistance. S&P said it may make a decision by February 2012.

Fitch Ratings on Nov. 18 said an IMF agreement would reduce pressure on Hungary’s credit rating, adding that a deal remained a “long way” off and would carry “strict conditionality.”

“We give a high chance for further downgrades to come in the upcoming months,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG (RBI), said in an e-mail.


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