Moody's Lowers Hungary To Lowest Investment Grade Category Baa3 From Baa1; Austria Next

Tyler Durden's picture

If Hungary's economy deteriorates as Moody's expects it to, Austria is next. We expect an Austrian downgrade shortly. From Moody's on Austria's primary economic derivative.

Moody's Investors Service has today downgraded Hungary's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1.

The key drivers for the downgrades are:

1. Increased concerns about the country's medium- to long-term fiscal sustainability; and

2. Higher external vulnerabilities than most of Hungary's rated peers.

The outlook on the ratings of the government of Hungary remains negative. The negative outlook reflects the uncertainties regarding the government's financial strength, as the country's structural budget deficit is set to increase and external vulnerabilities make the country susceptible to event risk.

Moody's has today also downgraded Hungary's country ceiling for the foreign-currency debt by two notches to A1 from Aa2, and the country ceiling for foreign-currency bank deposits to Baa3 from Baa1. The local-currency ceilings for bonds and bank deposits have been downgraded by three notches to Aa3 from Aaa.

In a related rating action, Moody's has downgraded the National Bank of Hungary's (NBH) foreign-currency debt rating to Baa3 from Baa1 given that the Republic of Hungary is legally responsible for the payments on NBH's bonds.


"Today's downgrade is primarily driven by the Hungarian government's gradual but significant loss of financial strength, as the government's strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies," says Dietmar Hornung, a Moody's Vice President -- Senior Credit Officer and lead analyst for Hungary. "As a consequence, the country's structural budget deficit is set to deteriorate."

These temporary measures consist of extra levies on financial institutions and other selected sectors. The government also intends to transfer to the public pension fund (until the end of 2011) the part of pension contributions that is normally transferred to the private pension pillar. This will result in a one-off revenue inflow in 2011 as well as a reduction in outstanding debt, as bonds currently held by the pension funds are cancelled. However, even if the near-term deficit targets are met by means of pension changes, the longer-term implications of the weakening of the private savings scheme are negative for public finances. This is because the government will assume responsibility for future pension liabilities in exchange for the inflow from ongoing contributions.

Today's rating action also reflects Hungary's high external vulnerability as the absence of more permanent fiscal consolidation poses heightened risks to medium- to long-term fiscal sustainability. In addition, the government, banking system and private sector each carry substantial external debt. Hungary's levels of external debt are high relative to those of its rated peers, especially non-European ones. The government also depends on purchases of its debt issuance by non-resident investors, implying that the maintenance of confidence among foreign investors is vital.

There are, however, certain key strengths of Hungary that merit attention. Hungary benefits from a significant level of economic and financial integration with Europe, which supports two-way trade and attracts foreign direct investment (FDI). Recently announced FDI projects reflect that Hungary remains well-positioned in the location-based competition for investment. Moreover, as an EU member, Hungary can rely on the availability of substantial external support -- as illustrated by the 2008 EU/IMF support package -- a feature that supports the credit. An additional strength of Hungary is the high share of foreign-owned banks within the banking system, adding to the resilience of the financial sector.


Moody's may again downgrade the ratings if the government fails to stabilise its financial strength. The stabilisation of the government's financial strength may be complicated by increased risk aversion from investors, reflected in exchange-rate pressures or rising financing costs.


The outlook on the government's Baa3 bond ratings could move to stable, and the ratings could eventually be upgraded, if the country embarks on a sustainable consolidation path -- possibly supported by a resumption of robust economic growth -- that stabilises government financial strength on a sustained basis.

h/t Mark Manfsield

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ZeroPower's picture

Austria before Belgium?

TraderMark's picture

15 minutes of super smart David Einhorn.  Depants America and the subsidy that is going from savers to debtors/banksters of America.  Says gold goes higher.

westboundnup's picture

Moody's.  More Pest than Buda.

unky's picture

Any sources for Austria, please? I thought they were very well financed and have a similiar attitude towards money as switzerland and luxembourg

breezer1's picture

austria carries a lot of debts from the less worthy. enough to sink it.

Oh regional Indian's picture

The PIIGS are getting hung(a)ry. They were not allowed to slim down, now they will consume all.


Poor EU, thor's hammer strikes, should never have messed with Iceland!


johngaltfla's picture

And if you look at the charts of the Austrian banks, it doesn't take a Cramer to figure out who is holding the bag with regards to Hungarian debt...

willien1derland's picture

Although I am certain that Moody's assessment is correct (albeit late) I cannot imagine that Hungary is the only country with issues?! I mean if Hungary is barely investment grade I would think it is a safe assessment that Greece is at the same or lesser credit quality - But then again Credit Agencies are IRRELEVANT -

potatomafia's picture

So does this mean that Austrian Economics wont help us out of this mess either??



Snidley Whipsnae's picture

Austrian pols ignored Von Mises and listened to Keynes. It was Keynes that told the pols what they wanted to hear; 'save money in fat years and spend it into the economy in the lean years' Of course, the pols did not save money in the fat years....and Keynes was regurgitating what the pharos said long ago, but did not credit them.

Austria will soon wish it had listened to Von will the rest of the world. 

eigenvalue's picture

They should listen to Frederich Hayek, who is their fellow countryman.

Id fight Gandhi's picture

Cnbc said everything is fine

cbaba's picture

Sovereign Wideners


5 Yr Spread

Change (%)

Change (bps)

CPD (%)




































breezer1's picture

invest in hard currency, iceland. its frozen.

Clapham Junction's picture

When will Moody's downgrade itself?

We need one of those cartoons (the Bernank, etc.) about the rating agencies.


trav7777's picture

the entire edifice of 'debt' as an institution must be downgraded, because the future does not hold the growth to pay principal + interest.

All present debts, and vicariously, money, must be discounted.

Bring the Gold's picture

Global Jubilee is the only way out. Well the only way out that actually has a shred of humanity to it. Seems the Banksters want to jubilee themselves and become nobility over the rest of us as debt slaves.

If they aren't willing to give the rest of the world some buy in I think we will see a new set of Nuremburg trials after another global conflagration.

Disclosure: Long pitchforks, torches and rope...especially rope.

ZeroPower's picture

Except they won't be, and this notion of debt being money and vice versa will exist for on and on. I hope this is clear.

johnnymustardseed's picture

Moody's... really. Why does anything they say matter?

luibenat's picture

Luibenat from Italy, in Ungary there are also italian big banks, first of all UNICREDIT

Gimp's picture

How quickly the rating agencies have regained credibility after suspect ratings for the past five years. How da do dat, Barney Fawnks?

CABO's picture

Just like 1931 it will be Austria that will start the second phase of the depression. The Rothschild family bank Creditanstalt declared bankruptcy on May 11, 1931.   The demise of the Creditanstalt and the Austrian government was followed by a Global bank run, a financial crisis in Germany and an attack on Sterling, which was depreciated a massive 25 percent as a result. Afterwards, central banks began a run on the U.S. dollar, liquidating it for gold. The banks included the Bank of France, the National Bank of Belgium, the Netherlands Bank and the Swiss National Bank. The result was an immediate need to increase the interest rate in the U.S. from 1.5 to 3.5 percent.

These events triggered further panics and bank runs in the U.S. The U.S. dollar depreciated 40 percent; multiple bank holidays were called to contain the panic. The U.S. President Franklin D. Roosevelt forbid ownership of gold, in an effort to control inflation, and prevent the collapse of paper money .  The U.S. economy bottomed only in April 1933.

So keep a close eye on Austria’s banks…