beyondbrics

If one credit rating agency cuts you to junk, you can argue with the credit rating agency. But when a second does the same, you really need to look to yourself for an explanation.

In Hungary’s case, it’s not hard to find. S&P signalled last month that it was considering downgrading Budapest – and gave itself until February to decide. In the event it didn’t need nearly that long. On Wednesday it followed Moody’s in cutting Hungary to junk. It can’t be long before Fitch follows suit.

The news  hit the forint hard: it plunged by up to 1.8 per cent against the euro before recovering to trade at 307.2,  down 0.1 per cent at 0850 Budapest time. The HUF has lost 2 percent in the last two days, extending its decline in the second half of 2011 to 13 per cent, the most among more than 170 currencies tracked by Bloomberg.

S&P said in a statement that it was cutting Hungary’s rating one step to BB+ from BBB- ,  due to the declining predictability of Hungary’s economic policies.  The International Monetary Fund and the European Union last week suspended talks over a loan package to Budapest in protest at plans for a central bank law that may curb the institution’s independence. To the government’s annoyance, the central bank this week raised rates out of concern for the forint.

S&P said:

The predictability of Hungary’s policy framework continues to weaken, harming Hungary’s medium-term growth prospects. The weakening is due, in part, to official actions that, in our opinion, raise questions about the independence of oversight institutions and complicate the operating environment for investors.

Hungary’s government will have none of this. As Kester Eddy writes from Budapest, the economy ministry said in a statement that the downgrade was not a judgement on Hungary, which was a “victim” of the eurozone crisis and its struggle with the dollar.

The S&P decision was “clearly not based on an assessment of the facts,” for example, ingnoring the fact that the budget deficit remains on track to meet the government target of below three per cent, “despite all the difficulties”, said the ministry.

The markets take a different view. Danske Bank said in a note:

It is clearly worrying that the Hungarian government apparently continues to ignore how negative the consequences of its actions are. When Moody’s downgraded Hungary in November the Ministry of Economics in a statement said it was a “financial attack” on Hungary.

In a reaction to S&P’s rating action the same Ministry said: “S&P
purposely ignored that there has recently been a positive change in the gauges that serve as the basis of the evaluation”. We have found it hard to detect this “positive change” and have been puzzled that S&P did not cut Hungary’s rating earlier, as the Hungarian government’s policies render it difficult for international investors to be positive on the outlook for the Hungarian economy and markets.

Moody’s lowered its assessment to Ba1, the highest junk grade, on November 24.  Fitch, which has Hungary on its lowest investment grade, BBB-,  can’t wait long.

Related reading:
Hungary and the IMF: not so fast, beyondbrics
Hungary, Lex
ECB to Hungary: mortgage law stinks, beyondbrics