Fitch gives nod to Hungary despite stalled IMF/EU talks

BUDAPEST Fri Dec 21, 2012 4:20am IST

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BUDAPEST (Reuters) - Fitch improved its credit-rating outlook for Hungary on Thursday even though the country's loan talks with international lenders have collapsed after repeated differences over economic policy.

The rating of Hungary, Central Europe's most indebted state, was cut to junk by all the three major rating agencies a year ago as economic growth dried up and investors balked at policies including Europe's highest bank tax and the effective nationalisation of private pension funds.

While Fitch left the rating just below investment grade at BB+, its decision to upgrade its outlook on the rating to stable from negative was the first positive assessment from a major rating agency of the government's latest efforts to cut the budget deficit below 3 percent of economic output.

The government, which has signalled plans to raise funds by selling bonds to international investors, said the Fitch move rewarded sustainable fiscal consolidation. "We can safely and lastingly finance ourselves from the market," the economy ministry said in a statement.

Fitch warned, however, that the rating was constrained by uncertainty over the Hungarian economy's growth potential.

With Hungary's European Union partners also criticising policies seen as eroding the independence of the central bank and judiciary, talks with the EU and International Monetary Fund over a standby loan to protect Hungary's finances in 2013 have broken down.

Earlier on Thursday Economy Minister Gyorgy Matolcsy said that the government had fended off attacks in 2011 and 2012 that were aimed at its overthrow, including one from "the unified (European) Union left-liberal armies", and speculative market attacks involving ratings dowgrades aimed at causing a state default.

But after Fitch said on Thursday the country had made progress in cutting its budget deficit and stabilising its debt burden, the forint currency firmed a third of a percent, to 285.28 against the euro.

The forint has gained over 10 percent over the year, helped by foreign investors hungry for the high yields on Hungarian government bonds. Ten-year yields were down to 6.15 percent by Thursday, the lowest levels since 2005.

GROWING CONFIDENCE

Fitch said rapid cuts in Hungary's debt, a pick-up in growth or more business-friendly measures could lead to a rating upgrade and that a deal with the IMF would be "a positive surprise". But it warned that policy missteps or a global shock to investor sentiment could trigger a downgrade.

Just a month ago Standard & Poor's cut Hungary's long-term credit rating, already in junk territory, by one notch to BB, saying unpredictable policies could hurt medium-term growth.

Moody's, which also has a junk rating for Hungarian debt at Ba1, has not reacted yet to the latest efforts to slim the budget deficit which include a further rise in taxes on banks.

Over a year of stop-go credit talks with the International Monetary Fund and the EU, the government has increasingly given signals that it could live without an international backstop and wants to sell bonds worth 4-4.5 billion euros abroad next year.

"We always decide depending on market conditions, but we aim to raise the necessary funds as soon as possible," Laszlo Andras Borbely, deputy chief executive of the AKK debt agency, told a news conference on Thursday. He did not say in what currency the AKK planned to issue the foreign bonds.

He said the debt agency expected a deal sooner or later with the International Monetary Fund but this would have "no direct role in debt financing in 2013."

A Budapest-based fixed income trader said the 2013 financing plan was based on the expectation that major central banks would keep pumping out cheap cash, fuelling hunger for high returns like Hungary's. The government "has chosen the route without the IMF," the trader said. (Reporting by Krisztina Than, Sandor Peto; Editing by Ruth Pitchford)

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