Hungary’s economy minister reaffirmed the government’s commitment to following a strict fiscal policy in a statement on Friday, after ratings agencies put Hungary on review for a downgrade.
Gyorgy Matolcsy’s statement said, however, that the government’s policy would not involve the “usual” austerity measures which hurt families and businesses.
The minister also said that the credit rating agencies do not trust the government to follow a strict fiscal policy in 2010 and 2011.
“They don’t understand that a disciplined budget does not mean that a government has to give up shaping and pursuing an independent economic policy,” the statement added.
Moody’s Investors Services on Friday said it had placed Hungary’s local and foreign currency government bond ratings on review for possible downgrade, because of “increased uncertainty regarding Hungary’s fiscal outlook and economic prospects” following the suspension of talks with delegations from the IMF and EU. Hungary is rated Baa1 by Moody’s
“This uncertainty is the result of the recent breakdown of Hungary’s talks with the IMF and EU (after a disagreement over the country’s 2010-11 fiscal deficit targets), which in turn led to a suspension in the next disbursement from the IMF/EU EUR 20bn loan programme for Hungary,” Moody’s said.
Meanwhile Standard and Poor’s on Friday revised its outlook for Hungary’s sovereign debt rating to negative from stable, citing risks involved in the government’s key economic plans.
“The negative outlook reflects our opinion that key components of the government’s plan to consolidate public finances could prove harmful to Hungary’s medium-term growth prospects, reducing the government’s ability to put the public finances onto a more sustainable footing,” said S+P credit analyst Trevor Cullinan.
Default insurance spreads on Hungary’s outstanding sovereign debt widened after the rating agencies made their announcements, but market analysts said that the widening had not been “dramatic”.
The mid-spread of Hungary’s five-year credit default swaps (CDS) hovered around 346 basis points in late Friday trading after closing the previous session at 328 basis points, CMA DataVision, a leading market data monitor told MTI-Econews in London. Analysts at CMA said, however, that “nothing insane” was happening.
Neil Shearing, senior emerging markets economist at Capital Economics in London said that while Hungary “can probably survive” without a new IMF/EU programme for the remainder of this year, “we suspect it will eventually be forced to re-engage with the Fund either later this year or early in 2011… and on much stricter terms”.
Although Hungary’s gross external financing requirement has fallen as a share of GDP over the past year, it still remains close to its pre-crisis levels.”What’s more, the small drop over the past twelve months or so is due in large part to a narrowing of the current account deficit, stemming from a collapse in domestic demand,” he said.
Accordingly, against a backdrop of fragile global risk appetite, “we suspect that Hungary will eventually be forced to seek further help from the IMF/EU … but future assistance is likely to come with much tougher conditions attached,” said Shearing.
The forint traded at 287.37 to the euro late Friday, compared to 283.83 on Thursday.