Posts Tagged ‘Moody’s Investor Service’

Hungary’s Debt Downgraded to Junk

Wednesday, January 4th, 2012

Yet another European nation – and one not in the Eurozone – is facing a financial crisis now that Standard & Poor’s (S&P) has downgraded its credit rating to junk status. The nation is Hungary, whose status was changed as a result of concerns about proposed policy changes regarding the country’s central bank.  S&P cut its rating on Hungary’s debt to the non-investment grade of BB+ and warned that there could be additional adjustments.  Its negative outlook on the Hungarian front means there is at least a 33 percent likelihood of another downgrade over the next year if Hungary’s fiscal performance worsens.

The lower rating could mean that Hungary has more difficulty borrowing, and may have to pay higher rates on its debt.  Moody’s Investor Service, a rival credit-ratings agency, had already reduced Hungary’s rating to junk status in late November.  According to S&P, policy changes related to Hungary’s central bank will curtail its independence; these changes by necessity complicate the scene for investors.  They’re likely to negatively impact investment and fiscal planning, which will weigh on Hungary’s medium-term growth prospects.  “The downgrade reflects our opinion that the predictability and credibility of Hungary’s policy framework continues to weaken,” S&P said.

Not surprisingly, the European Central Bank (ECB) is concerned about Hungary’s draft law that it says would undermine the independence of the country’s central bank. The government recently introduced proposals to merge Magyar Nemzeti Bank (MNB) with the Financial Supervisory Authority, name a new president who will outrank the current central bank governor and increase the number of members of the governing council.  All of this would be “to the detriment of central bank independence,” the ECB said.  “In particular, by appointing a new president with authority over the Governor of the MNB, who would become the vice-president of the new institution, the personal independence of the MNB’s Governor would be impaired and Article 14.2 of the Statute of the European System of Central Banks concerning the possible reasons for dismissing the Governor of a national central bank would be breached,” the ECB said.  “The Governing Council of the ECB has requested the Hungarian authorities to bring their consultation practice into line with the requirements of European Union law and to respect the obligation to consult the ECB.  Three major revisions of the central bank law in 18 months are incompatible with the principle of legal certainty.”

The independence of the central banks in European nations is enshrined in European Union treaties. However, Hungarian Prime Minister Viktor Orban wants to use his two-thirds majority in parliament to push through changes in the make-up of the decision-making entities of the MNB, with whom he has frequently disagreed over policy.

According to Business Week, “Hungary will probably overshoot its budget-deficit target next year, the central bank said.  The shortfall may be 3.7 percent of gross domestic product, compared with the government’s 2.5 percent goal, the Magyar Nemzeti Bank said.  The gap may be reduced to 2.6 percent with the ‘complete cancellation’ of budget reserves and assuming no unexpected spending and no shortfall in revenue in 2012.  A decline in risk premium may allow keeping the benchmark interest rate unchanged at seven percent, the highest in the European Union, or its ‘cautious reduction’, the central bank said, citing the rate-setting Monetary Council.  The rate may have to be ‘permanently’ higher if the pace of disinflation is slower than the bank’s forecast.”