Hungary’s debt downgraded to ‘junk’ status

Ratings agencies have downgraded the EU member state due to the country’s ‘unorthodox’ economic policies [Reuters]

The ratings agency Fitch has piled further pressure on Viktor Orban, Hungary’s embattled prime minister, as it joined Moody’s and Standard & Poor’s in downgrading the European Union member’s debt to “junk” status.

Fitch said the cut by one notch in its rating to BB+, with a negative outlook, was due to “further deterioration in the country’s fiscal and external financing environment and growth outlook.”

It said this was “caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF/EU deal”.

Orban, against whom tens of thousands of people demonstrated on Monday, defiantly refused to alter new central bank legislation that is holding up financial help from the International Monetary Fund (IMF) and EU.

IMF and EU officials broke off preliminary talks last month about a possible credit line of $20 to $25bn due to worries about reforms to the central bank.

Key financial indicators, having taken a hammering this week, all recovered slightly, however, with traders saying Fitch’s move had been widely expected.

Hungarian government spokesman Andras Giro-Szasz said Budapest found the downgrade “surprising.”

“Over the last 24 hours the government and even the prime minister have made several statements which made the government’s goals with the EU and the IMF talks clear,” he said.

Foreign Minister Janos Martonyi told France’s Le Figaro newspaper, in an interview due to appear on Saturday, that his country remained committed to talks with the EU and IMF.

These negotiations “will not fail. I am not saying we are ready for everything. What I am saying is that everything is negotiable,” he said.

‘Destructive economic policy’

Hungary’s currency, the forint, which on Thursday hit a new record low of 324 against the euro, on Friday recovered some ground and before closing was trading at 316.25 against the single currency.

The yield on Hungarian 10-year bonds stood at 9.98 per cent, down from a high of 10.7 per cent on Thursday but at a level that still makes borrowing costs painfully and unsustainably high.

The cost of insuring against the country defaulting on its debt also hit a new high on Thursday but eased slightly on Friday.

Peter Oszko, former finance minister from 2009 to 2010, blamed the situation not on the global slowdown but on the “destructive economic policy of the government.”

In concerns echoed by the European Central Bank, the IMF and EU fear that the recent central bank legislation, part of a barrage of reforms under a new constitution, will give Orban’s government undue influence in setting interest rates.

“If one [central bank] is perceived as not being fully independent this would create a problem for the whole EU,” the EU executive’s spokesman Olivier Bailly said in Brussels on Thursday.

But Orban sees things differently. “We have adopted 13 and a half of 15 recommendations by the European Central Bank, which could easily be a European record, and we continue to be co-operative,” he said.

“The central bank act itself declared the independence of the institution.”

His foreign minister added that a Hungarian exit from the EU was “absolutely not” on the cards.

‘No other alternative’

Orban denied the government intends to tap the central bank’s $48.5bn in foreign reserves to avoid bankruptcy, a fear that prompted investors to avoid Hungarian assets in recent days.

The prime minister spoke after a meeting with the governor of the central bank Andras Simor, and the head of Hungary’s IMF delegation Tamas Fellegi, who will travel to Washington on January 11 for talks with fund officials.

Members of the government “know that there is no other alternative to financing the country than the IMF bailout,” Erste Bank analyst Zoltan Arokszallasi told the AFP news agency.

The central bank reform, passed in the last days of 2011 in a parliament where Orban has two-thirds majority, is part of a raft of laws that came into effect under a controversial new constitution on January 1.

The constitution also removes checks and balances on the power of Orban’s government, increases its influence on the judiciary and skews the voting system in his Fidesz party’s favour, critics say.