Downgrade pushes Hungary deeper into crisis

Hungary grappled Friday with a downgrade of its credit rating to junk bond status and sharp criticism of its economic polices, pushing it further into crisis. Late Thursday, Moody's rating agency downgraded the country's sovereign debt to non-investment grade for the first time in 15 years, sending the forint crashing to 317.25 against the euro, near its all-time low. Budapest blamed this fall from grace on the eurozone crisis and gloomy international market sentiment, but analysts, opposition parties and investors castigated the policies of Prime Minister Viktor Orban's government. Moody's and fellow ratings agency Standard and Poor's highlighted the "weaker predictability and credibility" of the government. While the forint has sunk by nearly 20 percent against the euro in recent weeks, the Polish zloty has slid by 11 percent and the Czech koruna just five percent. Under pressure from the markets and in a bid to stave off ratings downgrades, the government finally turned to the International Monetary Fund and the European Union for assistance earlier this week. It was a policy U-turn for Orban who until then had always advocated independence, although Economy Minister Gyorgy Matolcsy boasted on Thursday of "the success" of the government's economic policies. He trumpeted they "can only be compared to the reconstruction of the country after World War II." The centre-right government has prided itself on slashing the country's sovereign debt and producing a budget surplus in 2011. But one-off measures put in place to reach these goals such as the windfall tax on banks, telecommunication, energy and retail sectors and the nationalisation of private pension funds have failed to offset the effects of income and corporate tax cuts. A recent measure allowing the repayment of foreign-currency-denominated mortgages at 20 percent below prevailing market rates also angered the financial sector, which is dominated by European banks, and triggered a sharp response from the European Central Bank. Nevertheless, Budapest interpreted the growing market discontent as a "series of speculative attacks." Orban launched a probe into who might be behind "a conspiracy against the forint," even as Hungary's currency fell to record lows and investors shunned Hungarian debt for safer investments. "This rhetoric perfectly suits the communication style of the Hungarian government," Matyas Kovacs, an analyst at Raiffeisen Bank, told AFP. "But the higher the bond yields climb, the higher the pressure will mount on the government to find a common ground with the IMF," he added. Budapest has some leeway however, as two of the three major rating agencies are still maintaining Hungary at investment grade, noted Kovacs. Standard & Poor's said Thursday it was holding off an expected downgrade of Hungary until it sees what kind of agreement it reaches with the IMF and EU, and also criticised government policy. "It will hurt more when we fall into junk status at two agencies, as that is when large American funds start selling Hungarian bonds," Kovacs added. Peter Kreko, head of the analyst firm Political Capital, meanwhile warned that Hungary's economic turmoil could turn into a political crisis, and that a lack of agreement with the IMF could lead to Orban's fall. Although the prime minister's Fidesz party has a two-thirds majority in parliament, "if a country finds it cannot finance itself, even the strongest politicians might be forced to leave," Kreko said. This did not necessarily mean that new elections were forthcoming, but "a new majority might be created behind a Fidesz figure who possesses the economic knowhow to present a credible economic policy," he predicted. The opposition has already called for Matolcsy to step down, blaming him for the government's unorthodox economic policy, which has been dubbed "Matolcsism" in Hungary. A government spokesman insisted Friday however that: "Matolcsy is here to stay." At the close of business, the forint had recovered slightly to 315.46 against the euro, after hitting 317.25 in the morning.