S&P 'junk' downgrade adds to Hungary woes

Hungary was under increased pressure on Thursday to secure IMF support after a second rating agency cut its debt rating to "junk" status and the ECB warned Budapest over central bank independence. Hungary is seeking a credit line of 15-20 billion euros ($19.7-26.2 billion) from the European Union and International Monetary Fund but EU and IMF officials quit talks here last week in protest over government changes at the central bank. The latest downgrade came late Wednesday from Standard & Poor's which said the move "reflects our opinion that the predictability and credibility of Hungary's policy framework continues to weaken." The move hit demand at an auction of Hungarian 12-month treasury bills on Thursday, forcing the government to lower the amount on offer to 30 billion forints (98 million euros, $128 million) from a hoped-for 40 billion forints. The interest rate demanded by investors meanwhile rose to 7.91 percent, reflecting increased reluctance to buy, from 7.29 percent at the last auction on December 8, state debt management agency AKK said. Prime Minister Viktor Orban's planned reforms of the central bank "raise questions about the independence of oversight institutions and complicate the operating environment for investors," S&P said. For Gyorgy Barta, analyst at CIB, part of Intesa Sanpaolo, the downgrade "reflects investors' negative views" about Hungary. "The predictability of Hungary's policy framework continues to weaken, harming Hungary's medium-term growth prospects," said Peter Kreko, analyst at the Political Capital think-thank. The government insisted however that it was "easy to see" that S&P's move, after a similar downgrade by Moody's last month, was "not based on the evaluation of the Hungarian economy and financial system." Instead, the cut was due to "pressure by those market participants who are interested in strengthening the dollar zone and weakening the eurozone," it charged. The government stressed Hungary's solid fundamentals, saying the 2011 budget would be in surplus and that unlike in much of Europe, the public deficit would be less than the EU ceiling of three percent of output in 2012. Orban has drawn sharp criticism from the European Commission and the European Central Bank for the planned central bank revamp, which critics say is aimed at increasing government influence over monetary policy. The ECB's governing council in a statement on Thursday expressed its "concern about ... provisions in the draft law on the MNB (Magyar Nemzeti Bank) that could undermine the central bank's independence." European Commission head Jose Manuel Barroso wrote a letter to Orban "strongly" advising him to drop the planned legislation, but on Thursday, Commission spokesman Olivier Bailly said Brussels was still awaiting a formal response. Hungary's central bank chief Andras Simor has described the reforms as a "total takeover" by the government, bringing "the final elimination of the central bank's independence dangerously close." The government however, which has also come under fire over a controversial media law, a new constitution, justice reforms and unorthodox economic policies, says the changes are a response to past failures by the bank. It also shrugged off the IMF and EU's departure last week, saying "formal" talks would start in the new year, although Bailly noted Thursday that the Commission "has not yet decided on resuming formal or informal talks with the Hungarian authorities on a possible financial aid." The forint, which has slumped more than 20 percent against the euro in the last three months, slipped to 309 against the single currency early Thursday before recovering slightly to 307.44 but was still down from 303-304 forints on Wednesday. On Tuesday, it briefly hit 299 forints after the central bank hiked its main interest rate by half a point to 7.0 percent. Even before the rise, non-eurozone Hungary had the highest main interest rate in the 27-nation EU and the central bank, forecasting 5.0 percent inflation in 2012, said borrowing costs may rise further. The rate hike earned a sharp rebuke from the government, saying it "hinders Hungary's healthy economic growth" and went against the trend of lower borrowing costs elsewhere in Europe, not least in the eurozone.