Hungary has been a growing problem in the last few weeks, and a Moody’s rate cut on government sovereign debt from Ba1 to “junk” Baa3 yesterday is just fanning fears that Hungary is on the brink of default.
Borrowing costs have been shooting out of control, back to levels not seen since right before Hungary received a bailout from the IMF in 2008. Since then, the country has been unable to make the reforms necessary to balance its books, and has refused future IMF aid. Further, the rapidly declining value of the forint threatens to undermine the financial system.
From the Moody’s release, here’s the agency’s rationale for the rate cut:
1.) The rising uncertainty surrounding the country’s ability to meet its medium-term targets for fiscal consolidation and public sector debt reduction, particularly given Hungary’s increasingly constrained medium-term growth prospects.
2.) The increased susceptibility to event risk stemming from the government’s high debt burden, heavy reliance on external investors and large financing needs as the country enters a period of heightened external market volatility.
The big concern for most investors is not that Hungary will go under, but that it will take down Austrian banks in the process. They’re heavily exposed to Hungary, and considering the already fragile situation in the eurozone, this could spark fears about the stability of Austria and its sovereign rating–regardless of the fact that the country is in good shape.
Check out yields on Hungarian 10-year bonds over the last few months. They’re topping 9.5% this morning: