Citing uncertainty over the country's ability to meet 'austerity' targets and its rising susceptibility to external shocks - given its heavy reliance on external investors - Moody's just downgraded Hungary to Junk Ba1 (with a negative outlook).
Moody's Statement Summary:
The key drivers for the downgrade and negative outlook are as follows:
1.) The rising uncertainty surrounding the country's ability to meet its medium-term targets for fiscal consolidation and public sector debt reduction, particularly given Hungary's increasingly constrained medium-term growth prospects.
2.) The increased susceptibility to event risk stemming from the government's high debt burden, heavy reliance on external investors and large financing needs as the country enters a period of heightened external market volatility.
Moody's believes that the combined impact of these factors will adversely impact the government's financial strength and erode its shock-absorption capacity. The rating agency's decision to maintain a negative outlook on Hungary's ratings is driven by the uncertainty surrounding the country's ability to withstand potential event risks emanating from the European sovereign debt crisis.
Moody's has also downgraded by one notch to Ba1 from Baa3 the foreign-currency debt rating of the National Bank of Hungary (NBH) given that the Republic of Hungary is legally responsible for the payments on NBH's bonds.
With its 10Y yield currently at 9%, only 190bps wider than Italy, we thought it somewhat ironic that Hungary's average 10Y yield from SEP09 to SEP11 was 7.2% - almost exactly where Italy finds itself trading currently.