The Hungarian government’s erratic policies and populist rhetoric have come home to roost. Moody’s downgraded the country’s sovereign rating to ‘junk’ late yesterday, citing deteriorating growth prospects and a lack of clarity over how the government will rein in public debt. (See Moody’s press release.)
The other ratings agencies still place Hungary on the lowest rung of the investment grade ladder, but I expect that will soon change. The downgrade is no surprise. I’ve dedicated a fair number of posts over the past six months to describing Hungary’s economic and political problems. Some of the links are below:
- Hungary’s Latest Debt Relief Plan: From Bad to Worse
- Hungary’s Vicious Circle: Anemic Lending and Weak Growth
- Hungary: Finally on Investors’ Radar
- Hungary and Turkey: Political Parallels
- Fitch Raises Hungary’s Ratings Outlook: Odd Timing
- The Double Whammy: Debt and Demographics
- Is CEE Better Prepared This Time Around?
Hungary’s last-ditch request for IMF help was too little, too late. As I previously noted, the government publicly trumpeted its interest in a deal before notifying its own central bank – or even the IMF itself – which suggests it was merely a ruse to delay a ratings downgrade. (See my Weekly Mishmash: November 22)
Despite the downgrade, the government does not appear to be coming to its senses. Disturbingly, it seems more out-of-touch than ever based on the Economy Ministry’s latest statement:
“Since the decision by Moody’s has no realistic basis, the Hungarian government can only interpret this as being part of a financial attack against Hungary.” (reported by Zoltan Simon and Abdras Gergely of Bloomberg)
There’s no doubt that eurozone turbulence has compounded Hungary’s already serious economic woes, but the real culprit here is the government and its policies. From the effective nationalisation of private pension assets to its ill-conceived mortgage relief plan, the government has consistently shown disregard for the country’s long-term economic health and an unwillingness to take any responsibility.
According to Bloomberg, the yield on Hungary 10-year yields jumped over 9.5%. This rise in borrowing costs and the slide in the forint will accentuate the country’s economic woes. As one reader aptly commented a few weeks back, Hungary is ‘circling the drain.’ Its significant reserve cushion diminishes the threat of a near-term default. However, the government has large chunks of debt coming due next year (see figure below).
Will the government swallow its pride and agree to a condition-laden standby agreement with the IMF? It may, but the country is in need of major structural reforms, and I don’t see the current Fidesz-led government having the political will to implement them.