UPDATE 2-Fitch downgrades Hungary as parlt approves 2011 budget

* Parlt approves 2011 budget in 257-119 vote

* Deficit target below 3 pct/GDP for first time since 2004

* Budget fixed by one-off revenue, risks over sustainability

* Fitch downgrades Hungary to BBB-, outlook negative

(Updates with parlt budget vote, adds more detail)

By Gergely Szakacs and Krisztina Than

BUDAPEST, Dec 23 (BestGrowthStock) – Fitch Ratings downgraded
Hungary to the brink of junk debt status on Thursday just as
parliament approved a deficit-cutting budget and the agency
warned of worse to come without longer-term fiscal medicine.

To get the shortfall within EU limits in 2011, the budget
relies on unorthodox, one-off measures that have alarmed markets
fearful that the gap will bulge out again after 2012 unless the
government comes up with more sustainable measures.

Fitch cut the country’s long-term foreign currency (Read more about trading foreign currency. credit
rating to BBB- with a negative outlook, sending the forint down
one percent just before the ruling centre-right Fidesz party
used its majority to win budget approval by 257 votes to 119.

Next year’s budget cuts the deficit below the European
Union’s ceiling of 3 percent of GDP with one-off revenues,
leaving markets hoping that more structural reforms due in
February will put the country on a sustainable fiscal path.

The low deficit next year will make Hungary a top fiscal
performer in the 27-member bloc, but the unconventional fiscal
measures and big windfall taxes used by the Fidesz government
boost risks after 2012, analysts, the central bank and ratings
agencies have warned.

The government will cut the 2011 deficit by raking in
temporary taxes, including new levies on profitable foreign
businesses, and up to $14 billion in private pension savings,
putting it on a potential collision course with markets and
voters.

“The new Fidesz government … has set out fiscal plans that
go in the wrong direction for further fiscal consolidation.
These plans could worsen the underlying medium-term budget
outlook by around 4 percentage points of GDP over 2011-2012,”
Fitch said.

It warned that a failure to implement credible medium-term
fiscal consolidation measures that restore public finances to a
sustainable course could lead to another ratings downgrade.

“A significant rise in the risk premium or absence of
sustained economic recovery would also have adverse consequences
for debt dynamics and the rating,” it added.

It said robust GDP growth and implementation of proper
fiscal consolidation could lead to “positive rating action”.

The attention of markets now turns to what the government’s
upcoming programme of what they hope will be more durable public
sector reforms.

Analysts say pressure from credit rating agencies — with
Hungary now on the brink of “junk” debt status at all three big
rating agencies — and rising refinancing needs as of next year
will put pressure on Budapest to come up with a meaningful
longer-term package.

Economy Minister Gyorgy Matolcsy has pledged a series of
reforms saving 600-800 billion forints ($2.9-$3.8 billion) a
year to make the deficit cuts sustainable in the long run.

“Should the package disappoint and only include cosmetic
changes instead of thorough reforms, a downgrade into junk
category would be a definite possibility. There simply is no
more time to beat around the bush, in our view,” said Gyorgy
Barta, analyst at CIB Bank.

ALL EYES ON REFORM PLANS

The forint (EURHUF=: ) fell nearly one percent to trade at
278.40 against the euro at 1313 GMT on Thursday following
Fitch’s ratings move, while bond yields rose only about 5 basis
points as markets had been expecting the fresh downgrade.

Hungary, which has smoothly issued government debt this
year, plans to issue foreign bonds worth 4 billion euros “as
soon as possible” next year to refinance expiring debt and begin
repaying parts of an IMF/EU loan that ushered it through the
global financial crisis.

The country decided to break ties with the International
Monetary Fund in July, and is now fully relying on markets to
finance its deficit and debt, although it still has 2.5 billion
euros of unused IMF/EU funds for financing if the need arises.

The central bank raised interest rates by 50 basis points to
5.75 percent (NBHI: ) over the past two months to fend off price
pressures fuelled by tax changes, and is keeping a close eye on
Hungary’s cost of insuring debt — CDS — which traded at around
390 basis points on Thursday.

The expected reforms in February are also needed to ensure
that Hungary’s public debt — at around 80 percent of GDP the
highest in central Europe — is put on a firm downward path
after a one-off decline next year due to changes in the pension
system — which private pension funds said amount to
nationalisation.
(Additional reporting by Krisztina Than; editing by Stephen
Nisbet)

UPDATE 2-Fitch downgrades Hungary as parlt approves 2011 budget