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S&P Downgrades Hungary to Junk After It Defies IMF and EU

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Hungary was downgraded to junk late Wednesday for the second time in a month, this time by Standard & Poor’s, after Moody’s took a similar action previously, but markets reacted little to the news.

They could be waiting for the third shoe to drop—a downgrade by Fitch Ratings to junk could spur a major market crisis. While bond prices dropped Thursday, it was far from panic selling.

Reuters reported that the Hungarian government called the move unjustified, and declared its resolve to proceed with lenders in January. Hungary has used some unorthodox methods to deal with its economic woes, and has resisted attempts to be reined in. S&P cited the center-right government’s unpredictable policies as a reason for the downgrade.

Prime Minister Viktor Orban broke ties in 2010 with the International Monetary Fund (IMF) in the name of “economic sovereignty.” His Fidesz party plans to push legislation this year that the European Union (EU) is opposed to. One measure in particular, which the EU said it should withdraw, is a central bank bill that is viewed as undercutting the bank’s independence.

A diplomatic source was quoted saying prior to the downgrade, “At the moment [Orban] is sitting in the car in head-on collision mode and is not willing to move.”

Orban seeks a new “insurance” type financing deal, which might assist Hungary in keeping its access to market funding in 2012; however, he is opposed to lenders interfering with his unconventional policies to boost the economy.

In a note, Barclays said, “[The downgrade] could, alongside market weakness, push Hungary towards engaging more constructively with the IMF and EU. It may also serve to fast-track the negotiations. But there is also a risk that Hungary’s government will try to soldier on without outside financial support, instead turning to more unorthodox policy measures.”