Fitch Cuts Hungary to 'Junk' on 'Unorthodox' Policies
Fitch became the third ratings agency to downgrade Hungary's debt to "junk" status on Friday, invoking further deterioration in the country's fiscal and external financing and growth outlook and the government's "unorthodox" economic policies.
Banks in euro zone countries have significant exposure to Hungary, with Austrian financial institutions having more than $40 billion in the country, Italian banks nearly $25 billion, German banks a little over $20 billion and Belgian banks over $15 billion, according to figures by the Bank of International Settlements and ING estimates.
Friday's move by Fitch was expected – as the ratings agency cut its outlook on Hungary in November last year – and did not have a big effect on markets.
In November, Moody's became the first agency to downgrade Hungary to below investment grade, citing a weak economic outlook and lack of predictability as the main reasons.
In December, S&P cut the country's rating to "junk" citing changes to the constitution that undermined the independence of the central bank as part of the reason for the downgrade, as well as rising unpredictability in the country's economic policies.
Earlier on Friday, controversial Prime Minister Viktor Orban said both his government and the central bank want a fast deal with the International Monetary Fund.
The IMF, the EU and the ECB have criticized the Hungarian government for wanting to curb the central bank's independence.
Since coming to power in 2010, Orban's government took over private pension funds, set a fixed exchange rate for loans in foreign currency taken during the boom years before 2008 — forcing banks to take the losses due to the national currency's depreciation — and imposed the biggest tax in Europe on banks, sparking investors' protests.
Fitch said the government's policies, popular with voters but which have prompted foreign investors' fury and have attracted international criticism, were part of the reason for the downgrade.
"The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF/EU deal," Matteo Napolitano, director in Fitch's Sovereign Group, said in a statement.
Fitch maintained a negative outlook for the country, saying that the policies enacted by Orban's Fidesz ruling party made it difficult for Hungary to abide by the strict conditions in an IMF loan, even if the country manages to clinch a deal with the Fund.
"Additional unorthodox policy measures have further undermined confidence in policy making," Fitch wrote in the press statement.
Talks with the IMF and the European Union on securing a new deal broke down in December after the government failed to ensure that it would change legislation perceived as contravening EU law. Afterward, Fidesz added into the legislation suggestions from the European Central Bank on the central bank's independence.
But it left in place provisions that Fitch said it views as reducing the independence of the National Bank of Hungary.
"Furthermore, the new constitution, which went into force on January 1 2012, subordinates changes to key tenets of economic policy (such as taxation) to a two-thirds parliamentary majority, thus reducing the scope for fiscal adjustment of future governments," Fitch said.
"Even if an agreement were to be reached, doubts would remain over whether the Hungarian government could submit to its strict conditionality, given its track record of policy unpredictability and the premature end in July 2010 of the previous IMF program," it added.
Analysts said the move was expected.
"Clearly the main risk is if the government fails to agree with the IMF/EU on the legal changes, but Fitch’s comments look like something that has been in the pipeline and should have been released earlier this week, ie before today’s meeting between the governor and the PM. We see the move as neutral," Simon Quijano-Evans, EMEA chief economist at ING, wrote in a market note.