S&P Is Second Rating Agency In One Day To Warn It Will Cut Hungary To Junk

Tyler Durden's picture

Earlier today it was Fitch; now, way after the close, it is S&P's turn: the rating agency just put Hungary on junk bond watch, due an "unpredictable policy framework", and better yet, advised readers that the almost certain downgrade from Investment Grade would happen this month. Naturally, if Hungary, AAAustria is next. Then all of Eastern Europe follows quickly and Germany finds itself in a war with contagion on every single front.

From S&P

Republic of Hungary 'BBB-/A-3' Ratings Placed On Watch Negative Owing To The Unpredictable Policy Framework

Overview

  • In our opinion, the predictability of Hungary's policy framework continues to erode, weighing on the economy's medium-term growth prospects.
  • As a result, we are placing the 'BBB-/A-3' foreign and local currency sovereign credit ratings on Hungary on CreditWatch with negative implications.
  • We are also placing the 'BBB-' long-term counterparty credit rating on the National Bank of Hungary on CreditWatch with negative implications.

Rating Action

On Nov. 11, 2011, Standard & Poor's Ratings Services placed its 'BBB-/A-3' foreign and local currency sovereign credit ratings on the Republic of Hungary on CreditWatch with negative implications. At the same time, we placed the 'BBB-' long-term counterparty credit rating on the National Bank of Hungary on CreditWatch with negative implications.

Rationale

The rating action reflects our view that a more unpredictable policy environment, stemming from a weakening of oversight institutions and some budgetary revenue decisions, will have a negative effect on economic growth and government finances.

The CreditWatch placement reflects our view that downside risks to Hungary's creditworthiness are increasing as the external financial and economic environment is weakening. The risks are further amplified by what we consider to be weakening institutional effectiveness, which has been undermined by changes to the constitution and the functioning of some independent institutions, such as the Fiscal Council. This is likely to have a negative impact on fiscal planning and investment activity, which we believe will continue to weigh on Hungary's medium-term growth prospects.

In our view, the imposition of temporary taxes on various services sectors could constrain investment and job creation over the short term, while moves to facilitate households' prepayments of foreign-currency-denominated mortgages at concessional rates could further reduce the supply of credit to the economy. These measures will constrain growth prospects and may put the government's fiscal targets in jeopardy and could prevent a sustained reduction in general government debt levels.

CreditWatch

Resolution of the CreditWatch action is likely this month pending further information from the Hungarian government regarding how it will address the ongoing economic challenges.