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Capital Markets

Hungary: Rating taken down a notch

Fitch has cut Hungary’s sovereign credit rating to BBB+ from A–, one of the first times that a new EU member state has had a downward, rather than upward, rating movement applied to it since the EU enlargement process began.

“The downgrade of Hungary’s sovereign ratings reflects the adverse impact of persistently large budget deficits, which have increased the public and external debt burdens,” says Edward Parker, a senior director in Fitch’s sovereign ratings group.

Last year was the third in a row that budget deficits had to be revised substantially up from original targets. The target of 4.7% for 2005 was significantly breached, reaching an estimated 7.4% by the year-end.

Bond prices continued to fall in December, with news that the government is to double its net debt issuance in forint to Ft831 billion ($3.9 billion), from Ft416 billion in 2005.

Following Fitch’s announcement, investor demand was poor at both three-year and 15-year bond auctions in mid-December, which, analysts said, was lower than at previous tenders, with higher yields. And although foreign holdings of domestic debt crept higher, they were still far below highs in the first quarter of last year.

Analysts say that unless foreign investors continue to return to domestic Hungarian securities in the coming months, demand for the significantly higher level of issuance this year will remain muted.

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