Moody’s cuts Hungary rating

The cut by Moody’s could renew pressure on the forint — which closed at 312.37 versus the euro on Thursday — when domestic markets reopen,and may push government bond yields further up from 2-1/2-year highs above 8 percent.

The forint hit a record low at 317.90 versus the euro on Nov. 14,according to Reuters data.

Moody’s cited rising uncertainty about Hungary’s ability to meet fiscal goals,high debt levels and what it called increasingly constrained medium-term growth prospects as the main reasons behind the downgrade from Baa3.

Moody’s believes that the combined impact of these factors will adversely impact the government’s financial strength and erode its shock-absorption capacity,it said in a statement.

The rating agency’s decision to maintain a negative outlook on Hungary’s ratings is driven by the uncertainty surrounding the country’s ability to withstand potential event risks emanating from the European sovereign debt crisis.

For a text of Moody’s statement,see [ID:nL5E7MO4J3

Moody’s said the request by Hungary,which was saved from collapse with a 20-billion-euro IMF/EU loan in 2008,for renewed assistance illustrates the funding challenges facing the country,adding that a deal could alleviate immediate funding challenges.

Many have been assuming that the bid for an IMF deal was an attempt to forestall such rating actions – but that came too late,said analyst Charles Robertson,global chief economist at Renaissance Capital.

This downgrade may eventually encourage the reformist policies that pushed Hungary into investment grade in the first place. Most helpful would be ECB/IMF action to stabilise the euro zone,he said.

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Hungary will have to roll over 4.7 billion euros of external debt next year as it begins to repay parts of its 2008 loan to the IMF. Budapest has said it wants to use a new IMF/EU deal as a safety net against turmoil in the euro zone.

However,Moody’s believes that,even with such an arrangement,the government’s debt structure will remain vulnerable to shocks in the medium term,which are inconsistent with a Baa3 rating,it said.

The weak forint pushed Hungary’s government debt to 82 percent of economic output by the end of the third quarter,undoing the impact of a $14 billion pension asset grab by the government,which cut debt by several percentage points.

Moody’s said it would further lower Hungary’s rating if there is a significant decline in government financial strength due to a lack of progress on structural reforms and implementation of a medium-term plan.

It said the government’s 2.5 percent of GDP budget deficit target for next year may be difficult to meet due to high funding costs and low economic growth.

Moody’s said it would consider stabilising the outlook on the ratings if the country were to embark on a sustainable consolidation path,involving a more consistent implementation of the medium-term plan and its euro-convergence programme.

The downgrade comes just hours after S&P deferred decision on a possible downgrade of Hungary to non-investment grade until the end of February,pending talks with the IMF/EU about a new aid package. [ID:nL5E7MO0HS

Fitch,another rating agency which has Hungary in the lowest investment-grade category,said on Nov. 18 that an agreement on a new IMF programme would be a positive step and could reduce downward pressure on Hungary’s sovereign rating.