Moody’s Investors Service cut Hungary’s rating from its lowest investment grade to junk on Thursday, with a negative outlook, despite the country’s appeal to the International Monetary Fund for help last week. Hungary is rated at the lowest investment grade by Fitch and Standard & Poor’s.
Up till now, according to a Bloomberg report, Hungary had avoided seeking any assistance from the IMF. The country takes an “unorthodox” approach to economic policies, including compelling banks to accept exchange rate losses on mortgage loans made in foreign currencies.
The country’s prime minister, Viktor Orban, has said that he does not want conditions attached to new credit lines; such conditions could forestall the policies Hungary has in place. However, after the forint hit a record low this month against the euro and yields on government bonds rose precipitately, the government finally turned to the IMF for help.
Aurelija Augulyte, a Copenhagen-based economist at Nordea Bank, was quoted in the report saying, ‘‘Hungary’s attempts last week to voice readiness to cooperate with IMF was a ‘show,’ which was meant to prevent the rating agency action, yet it didn’t help, given Hungary’s unwillingness to compromise. Moody’s interpreted the Hungarian attempt to seek assistance from the IMF as a desperate move.” The forint has been the world’s worst performing currency against the euro in the last six months; in that time it has fallen 15%.
Among the unorthodox measures Orban has used to combat its increasing budget are several one-time events, including the nationalization of $14 billion of mandatory private pension funds and extraordinary industry taxes. Hungary’s deficit hit 193% of its Cabinet’s annual goal through October. Moody’s said that the Cabinet’s plans to cut spending in the next three years face “rising uncertainty” as growth slows.
Hungary reacted by turning on its rater. “Since Moody’s decision has no realistic basis, the Hungarian government can only interpret this as being part of a financial attack against Hungary,” the Budapest-based Economy Ministry said in a statement on Friday.
On Thursday Portugal also saw its rating cut to junk by Fitch.