CORRECTED: Moody's says it might downgrade Hungarian debt

23rd July 2010, Comments 0 comments

Moody's credit rating agency said on Friday that it might downgrade the standing of debt issued by Hungary.

The agency justified its warning in a statement received here by citing growing uncertainty over the outlook for the budget and the economy.

It blamed the uncertainty on the breakdown on July 17 of Budapest's talks with the International Monetary Fund and the European Union which led to the suspension of the next instalment of a 20-billion-dollar-loan programme.

Hungary's sovereign rating is currently Baa1 and a downgrading of three notches would place it in the speculative category.

The Hungarian currency, the forint, dropped immediately from 283.40 to the euro to 285.66 following Moody's announcement.

"The failed talks... about the country's loan programme -- which represents a crucial policy anchor for Hungary -- has increased uncertainty about the authorities' determination to restore fiscal sustainability in the near term," said Moody's lead analyst for Hungary Dietmar Hornung.

"By espousing fiscal deficits above those recommended by the IMF and EU, Moody's believes that the Hungarian government has increased the uncertainty over whether its debt affordability will stabilise within the next two to three years."

Moody's move came after the Hungarian parliament pressed ahead with a controversial new bank tax despite criticism from the IMF and the EU it could hurt investment and growth in the country's still fragile economy.

The levy is key to Prime Minister Viktor Orban's plans to keep the public deficit at 3.8 percent of gross domestic product as required by the IMF and EU under the terms of the 20-billion-euro bailout package agreed in late 2008.

But the tax has come under fire not only from banks, but also the IMF and the EU which believe it will harm the investment climate and hit economic growth.

It was one of the main sticking points in the talks between Budapest and the IMF and the EU.

The IMF and the EU have warned the positive effects of the tax would be only short term and that it will have a negative impact on the investment climate and economic growth in due course.

Orban has said that Budapest is no longer interested in further financial aid from the IMF after the existing 20-billion-euro standby credit facility expires in October.

© 2010 AFP

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