News / Europe

    Hungary Condemns 'Junk Status' Credit Rating Downgrade

    Hungarian Economy Minister Gyorgy Matolcsy looks on before his meeting with Hungarian economists in Budapest, November 25, 2011.
    Hungarian Economy Minister Gyorgy Matolcsy looks on before his meeting with Hungarian economists in Budapest, November 25, 2011.

    Hungary has condemned a decision by the Moody's Corporation to downgrade the country's credit rating to a non-investment "junk" status. Moody's decision was made after Hungary asked the International Monetary Fund and the European Union for possible financial aid as it suffers from the debt crisis in the 17-country eurozone, even though it does not use the euro currency.

    Moody's, one of three international credit agencies, says uncertainty over the Hungarian government's ability to fulfill its debt reduction plans, and the country's vulnerability to external shocks, are among reasons for Thursday's downgrade.

    It also notes that foreign investors hold over 60 percent of Hungary's bonds, of which two-thirds are in foreign currencies. A weaker Hungarian currency, the forint, makes it more expensive for Hungary to pay back these foreign-currency loans.

    But the Hungarian Minister of State for National Economy, Zoltan Csefalvay, says that he views Moody's move to give Hungary's credit rating "junk" status as an unjustified financial attack on his nation.

    "I am really surprised because if you look at the fundamentals of the Hungarian economy and the significant efforts we have made in the last one-and-half years, we reduced significantly the public debt. We reduced also the deficit. So this means that the Hungarian economy as a whole is in a very good shape," Csefalvay said.     

    The minister adds that he realizes Hungary has to do more to, in his words "solve this problem" in the next few years.

    Yet, analysts expected the downgrade. The head of research at Raiffeisen Bank, Zoltan Torok, has told VOA News that Hungary's junk status is only partly due to its exposure to the mounting debt crisis in the 17-nation eurozone.

    He says there is also international concern about the right-of-center government's controversial fiscal policies.

    They include nationalizing private pensions for some 14 billion dollars, a recently introduced "crisis tax" on predominantly foreign owned companies and a banking tax on financial institutions.

    And, Torok says, especially international banks are forced by the government to potentially accept at least hundreds of millions of dollars in losses on foreign currency loans.  

    "It made possible early repayment of ((for instance)) the Swiss franc mortgages at a preferential exchange rate. This means, that currently the Swiss franc-Hungarian forint exchange rate is about 250. And the government said that each bank has to make possible a repayment at a preferential rate of 180. And all these losses should be taken by the banks," Torok said.  

    Eight banks have urged the EU's executive body, the European Commission, to intervene and Hungary's banks also asked the Constitutional Court to stop the debt-relief program. Hungarian authorities raided banks this week for allegedly undermining the loan arrangements.       

    Moody's downgrade adds to the series of setbacks for banks and Hungary as a whole.

    Hungary was in the 1990s the darling of foreign investments in the emerging countries of Central and Eastern Europe. But it later faced the region's highest debt, some 80 percent of gross domestic product at the end of 2010, and other economic turmoil.

    Those troubles were partly due to heavy expenditures on cradle-to-grave social security, a lack of structural reforms, and the global financial crisis.    

    In 2008 Hungary became the first European Union nation to receive a 25-billion-dollar rescue package from the International Monetary Fund, EU and World Bank.   

    Recently elected Prime Minister Viktor Orban broke off talks with the IMF and EU on a new credit-line, saying Hungary would no longer accept what he called “diktats” from these institutions in future negotiations.  

    Mr. Orban especially opposes austerity measures and other tough reforms often associated with IMF-led loans.

    But with the Hungarian forint now the world's worst performing currency, and Europe in turmoil, the government again turned to the IMF and EU last week to receive precautionary financial assistance, admits Minister Csefalvay.

    "I think Hungary is able to finance itself on the markets. But a safety net gives an additional security and additional safety. And ((in)) particular in this very, very turbulent time, the country needs this kind of safety net," Csefalvay said.

    Moody's says the request for some kind of assistance from the International Monetary Fund and the European Union "illustrates the funding challenges" facing this nation of 10 million people.

    Two other agencies, Fitch and Standard and Poor's, are also considering downgrading Hungary's credit rating, but still give the government some time.    

    Hungary's plight also affects other nations in Central and Eastern Europe. After the announced Hungarian downgrade, weakening of national currencies were seen in Poland and the Czech Republic.

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