BUDAPEST (Reuters) - Ratings agency Moody’s said on Friday it would decide within four months on whether to downgrade Hungary, adding that Budapest should commit to international lenders’ 2011 budget deficit target and fiscal reform would be at risk if Hungary fails to secure a new aid deal.
Earlier on Friday Moody’s put Hungary’s Baa1 local and foreign currency government bond ratings on review for possible downgrade, citing increased risks after talks between Budapest and the European Union and International Monetary Fund on renewing a 20 billion euro ($25 billion) aid deal collapsed last weekend.
Moody’s move came after Hungarian Prime Minister Viktor Orban signalled on Thursday that he would not renew a safety net with the IMF and would row back on a commitment to cut the budget deficit to European Union-prescribed levels next year.
“In case there will not be a new IMF programme that would increase the risk regarding the economic outlook and the fiscal reforms, it would be a drag on the outlook,” Moody’s senior analyst, Dietmar Hornung, told Reuters on Friday.
He said the budget deficit target proposed by the IMF and the EU for Hungary next year — 2.8 percent of GDP — would be sufficient to stabilise the country’s debt-to-GDP ratio going forward.
“That would give us reassurance (if) the government would adhere to this suggested target deficit,” Hornung said, adding that Moody’s would make a decision on Hungary’s rating within four months.
“The time horizon (for the review) is four months,” Hornung said. “If we have enough information we could conclude earlier than that.”
Sticking to the fiscal targets proposed by international lenders could help Hungary stabilise its debt to GDP ratio and would reassure markets of its creditworthiness, he said.
“We look beyond just purely the 2011 budget, so we are looking at to what extent the government is able and willing to formulate a coherent programme for fiscal consolidation and structural reform,” Hornung said.
Hungary was different from Greece, he said, but the central European country was still vulnerable to shifts in market sentiment due to high levels of foreign currency debt in both the public and private sectors.
“I can only reiterate that market confidence is a substantial factor for Hungary and that has to be kept in mind when assessing the credit, and obviously market confidence is sensible to statements of the authorities,” Hornung said.
Orban’s comments have stunned markets as they continue to grapple with worries about debt problems in Europe. On Thursday, he said he wanted equal treatment with fellow EU members on a time frame to cut the deficit, which is seen at 3.8 percent of GDP this year, to below 3 percent after talks on Hungary’s IMF/EU funding deal were suspended last week.
Orban’s centre-right Fidesz government will submit the 2011 budget to parliament in October.
The prime minister said Hungary’s EU and IMF deal would expire in October and has spurned warnings that Hungary could face market pressure and currency weakness without support from its lenders.