You know how we really don’t see the case for Hungarian government bonds? Here’s Fitch’s take. The agency downgraded Hungary’s credit rating to BBB- on Thursday.
Which means all three of the big credit rating agencies now hold the country just a notch above junk status. Worth noting as we head into another year of sovereign debt crises in the EU — the presidency of which goes to… Hungary in the first half of 2011.
The details on the downgrade, according to Fitch:
The reversal of pension reforms and lack of a coherent medium-term fiscal strategy undermines confidence in the long-term sustainability of the public finances. The stock of gross government debt is high at around 80% of GDP (on a European System of Accounts basis, around 75% net of government deposits) at end-2010, according to Fitch estimates, compared with the ten-year ‘BBB’ median of 35%. In addition, the government has high refinancing needs of around 15% of GDP in 2011 and 2012; IMF-EU loan redemptions then peak in 2013.
The government’s financing position makes it imperative to maintain market confidence, though its deposits do provide a buffer. The reversal of pension reforms, populist tax measures that fall mainly on foreign banks and companies, changes to the independent fiscal council and government moves that appear to interfere with the independence of the central bank are concerning signals. Investor confidence is also important for exchange rate and macro-financial stability in view of the high foreign currency exposure on domestic balance sheets.
Despite the improvement in its current account, Hungary’s relatively high gross and net external debt ratios and large external financing requirement continue to expose it to investor risk aversion. Fitch forecasts net external debt at 78% of GDP at end-2010 (on Fitch definitions), compared with the ten-year ‘BBB’ range median of 9%. Hungary is also exposed to a worsening in the euro area sovereign debt crisis, owing to its trade links, bank ownership, high public debt ratio and the prevalence of Swiss Franc-denominated domestic bank loans (equivalent to around 30% of GDP).
Outlook negative, too. No wonder with that kind of reliance on foreign investor confidence.
Related links:
Central bank SOS – FT Alphaville
Sovereigns and pensions, oh dear – FT Alphaville