Fitch cuts Hungarian debt to junk status

Credit ratings agency Fitch has cut Hungary's long-term foreign and local currency debt to junk status, following a tumultuous week for the country.

Fitch, following similar moves by Moody's and Standard & Poor's, has cut foreign-currency debt to BB+ from BBB and forint debt to BBB- from BBB, while placing a negative outlook on the grades.

Matteo Napolitano, a director in Fitch's Sovereign Group, said: "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."

Fears the country will be the first in Europe to default on its debt have intensified following the cancellation of part of the debt auction, where old debt would be swapped for new, and only 35bn forint was raised for a 45bn forint 12-month debt auction this week.

It was thought the action to cancel the auction would further jeopardise talks with the EU and IMF, which are set to meet with Hungary next week to discuss a rescue package.

The Hungarian government, led by Viktor Orban, has already fallen out with the EU and IMF over a law curbing the independence of the central bank.
Fitch also downgraded Hungary's short-term debt to B from F3, and its country ceiling by two notches, to BBB from A-. It initially put the country's debt rating on a negative outlook in November.

Hungary needs to roll over nearly €5bn of external debt this year, and in February is due to start repaying a loan from the IMF that saved the country from collapse in 2008.

Earlier today, Franklin Templeton Investments, which reportedly holds 10% of Hungary's local government debt, responded to fears about the region with Michael Hasenstab, manager of the $61bn Global Bond fund, saying the country has "healthy liquidity buffers".