Fitch Ratings agency downgraded Hungary's debt to one notch above junk status, citing budget plans that it warned are ill-considered but that the country's lawmakers approved soon after on Thursday.
Fitch said it was concerned about the government's economic strategy even though it has pledged to get the budget deficit below 3 percent of national income next year. The agency also said it was concerned that a heavy debt load makes the country particularly vulnerable to global economic shocks.
Despite Parliament's backing — unsurprising since the new Fidesz government won a two-thirds majority in elections earlier this year — of the budget, Fitch said the measures proposed, particularly on pensions, could actually worsen the public finances in coming years. It estimated that the deficit could deteriorate by four percentage points over 2011/12.
Fitch also didn't put much faith in the government's economic projections, describing the 2013 growth forecast of 5 percent as "optimistic."
Citing these concerns, Fitch said it cut its rating on the Hungary's public debt by one notch to triple B minus, one step away from junk status. Another cut is possible as Fitch also slapped a negative outlook on Hungary's rating — though downgrades are costly, junk status would hurt Hungary's ability to borrow.
"The downgrade of Hungary's rating reflects a material worsening in the underlying medium-term budget position, while relatively high levels of public, external and domestic foreign-currency debt leaves the country vulnerable to negative shocks," said Ed Parker, head of emerging Europe at Fitch.
Fitch said further downgrades may be prompted by a failure to implement credible measures to restore the public finances to a more sustainable path, an absence of durable economic recovery, a slowdown in capital inflows and difficulties among banks, local or foreign-owned.
The other two major ratings agencies, Moody's and Standard & Poor's, also have the country's creditworthiness just above junk status.
The key measure in Hungary's budget is a pledge by the government to reduce the deficit to below 3 percent of national income next year on the back of new levies on foreign-owned businesses, temporary tax rises and diverting pension savings.
The hoped-for revenues are meant to offset weaker government income from a new flat personal income tax, and compensate for a lack of major spending cuts.
Fitch said the plan to get the budget deficit down to 2.9 percent of gross domestic product is "flattered" by the pension reforms.
Hungary's economy was hit particularly hard by the global financial crisis. It received a two-year standby loan agreement of 20 billion euros ($26 billion) from the International Monetary Fund and other lenders in late 2008 to avoid bankruptcy, but did not draw on available funds from the end of 2009, preferring to finance itself from the markets.
Hungary's talks with the IMF and the EU were suspended in July, not long after the new, center-right government led by Prime Minister Viktor Orban took power. Shortly after, Hungary decided it would not seek a new agreement with IMF — seen as a sort of financial safety net — after the one reached in 2008 expired earlier this month.
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