Fitch Ratings Downgrades Hungary Sovereign Debt to ‘Junk’ Status

Fitch Ratings has downgraded the sovereign credit rating of Hungary to “junk” status, making it the third rating agency to do so.

Moody’s and Standard & Poor’s had already reduced Hungary to “junk” in recent weeks.

In cutting Hungary’s debt rating to BB+ from BBB-, Fitch cited Budapest’s unorthodox policies, which includes proposed controversial changes to the constitution and allegations that the state is seeking to remove the central bank’s independence.

Prime Minister Viktor Orban is also trying to reach an accord with the International Monetary Fund (IMF) over terms of a stand-by loan facility.

The downgrade of Hungary's ratings reflects further deterioration in the country's fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies, which are undermining investor confidence and complicating the agreement of a new IMF/EU deal, said Matteo Napolitano of Fitch's sovereign ratings division.

BBC reported that Hungarian homebuyers have taken out a large number of mortgages denominated in foreign currencies, particularly Swiss Francs due to their low interest rates. However, as the Hungarian currency, the florint, has plunged in value, mortgage-holders are finding it difficult, if not impossible, to repay their debts.

Fitch also pointed to Hungary’s deteriorating economic health.

Last month, the agency cut its 2012 euro zone GDP growth forecast by half to 0.4 percent. Given Hungary’s significant exposure to Euro zone trade, it also cut the country’s economic projection to a 0.5 percent shrinkage from a prior forecast of an 0.5 percent expansion.

“Fiscal and external financing risks have increased significantly since early November, owing to a deterioration in investor sentiment,” Fitch added.

“Hungary's high stock of government, external and private sector foreign currency debt and large associated financing requirements leave it vulnerable to adverse swings in investor confidence. The government faces external debt repayments of [4.6-billion euros] in 2012 (and larger ones in 2013-14), as well as large non-resident holdings of domestic debt to roll-over.”

Even worse, Fitch’s outlook suggests that there is a greater-than 50 percent probability of another downgrade within the next two years.