It was early in the morning on Saint Nicholas day, when in Hungary small children receive gifts, that the news hit the Hungarian wire service that Moody's Investors Service had downgraded the country's debt by two notches, from Baa1 to Baa3, just one tick above junk status. The Wall Street Journal and Reuters were the first to report the bad news; it took MTI an extra two hours to recover from the shock. It was a short announcement, pointing out that Moody's considered Hungary's economic outlook gloomier than that of some of the other countries in the region. It also mentioned the possibility of a further downgrade.
The follow-up MTI report was a bit more enlightening because the Hungarian news agency's reporters managed to get hold of Dietmar Horning, one of the vice-chairmen of Moody's. Horning tried to calm the nerves of the Hungarians by pointing out that a downgrade to junk status is not imminent. A negative outlook rating is usually given twelve to sixteen months before further action is taken. This time MTI reported more about the details that lay behind Moody's decision. They mentioned the "gradual but significant erosion of the financial strength of the Hungarian government," which is the result of temporary measures rather than sustainable budget consolidation.
Horning ventured to say that because of this ad hoc economic policy the budget deficit will grow. He also had a few harsh words about the "nationalization" of savings that may help to keep the deficit low for the time being but in the long run its effect will be negative.
As usual The Wall Street Journal's article on the subject was the most detailed; it included some quick interviews with analysts. Analysts the newspaper contacted warned that there's a real risk that Hungary may lose its investment-grade rating. But the Hungarian government responded that there is no reason to worry because measures the government introduced such as the tax cuts for small and medium-size companies and on personal income will improve Hungary's finances for years to come. Péter Szijjártó came up with the "best" explanation: "The downgrade came about as a result of the [government's] measures that hurt the interests of international capital in the short term." Those nasty capitalists. They had the gall to go to Moody's and demand action against the Hungarian government!
Financial analysts saw it differently. Preston Keat of Eurasia Research felt that "today's downgrade highlights Hungary's lack of commitment to fiscal reform. The government has shown very little appetite to deal with important structural issues, and continues to raise tensions with the EU and IMF." Christian Keller at Barclay's Capital claimed that “the news today cannot be read as anything but negative…The government has embarked on a pro-growth strategy financed by aggressive ad hoc fiscal measures." Perhaps the most interesting comment came from the economists at BNP Paribas who pointed to "Moody’s note in the statement that the budget headline numbers ‘don’t tell the story’ implying that there is a lot under the carpet. We have long been cautious over the country’s risk profile and remain negative on local assets and the forint in particular."
Peter Attard Montalto of Nomura, who specializes in Hungarian finance, wondered whether "this downgrade is the big trigger the market has been waiting for to move against the country." No one knows yet, but his feeling is that "some of the real money in the 'benefit of the doubt' camp may well start to get cold feet." And finally Timothy Ash at the Royal Bank of Scotland thought that "the government has been given a clear warning by the ratings agencies that it needs to correct policy, and address concerns over the sustainability of public finances over the longer term, or suffer the consequences by being downgraded to junk bond status."
At last Hungarian analysts also commented. One of them, Mátyás Kovács (Raiffeisen Bank), pointed out that people thought that after the municipal elections the government would reduce government expenses. This didn't happened and the result is the downgrade. Gergely Suppan (TakarékBank) thought that Moody's overreacted. Perhaps they could have waited until the spring for György Matolcsy's promised structural reforms. My feeling is that Suppan is overly optimistic about the importance of these so-called reforms. Matolcsy promised one hundred reforms. A critic rightly pointed out that he would be happier to hear about only three or four reforms, but reforms that were real. One hundred reforms are no reforms at all.
Finally, let's see what György Matolcsy had to say. He most likely told the truth when he said that he wasn't surprised, and I'll bet he was also truthful when he added that "we regret the announcement." As usual, Matolcsy found fault with others and not with his own policies. Moody's, according to him, should have considered other positive aspects of the Hungarian financial situation. Moody's didn't pay enough attention to the very low deficit rate in Hungary, the fifth lowest in the European Union. According to him Moody's should have considered that next year Hungary will be one of the two countries whose national debt will decrease. (Yes, next year!) And he again called attention to the promised structural reforms in the spring.
Meanwhile Viktor Orbán is gallivanting about. He just returned from Rome where he had an audience with the pope. I'm sure that it was a pleasant encounter because this Hungarian government's generosity toward the Catholic Church is unprecedented. Tomorrow he will be traveling to Stockholm where he will talk about Hungary's rotating EU presidency with Prime Minister Fredrik Reinfeldt. From there he will fly to Copenhagen where he will meet Prime Minister Lars Rasmussen. These two visits are part and parcel of his tour of twenty-six EU capitals in preparation for Hungary's becoming rotating president of the EU on January 1, 2011.