WRAPUP 3-Ratings agencies threaten Hungary with downgrade

* Uncertainty over outlook after IMF/EU talks ended -Moody’s

* S&P revises Hungary outlook to negative from stable

* Forint down 1.2 percent vs euro on the day

* Bond auction next Thursday will be test of sentiment

* Hungarian banks OTP, FHB both pass Europe stress test

(Adds fresh Orban comments, stress test)

By Krisztina Than and Gergely Szakacs

BUDAPEST, July 23 (BestGrowthStock) – Two top ratings agencies said
on Friday they might downgrade Hungary’s sovereign debt after
its prime minister snubbed the IMF and rejected austerity
measures in favour of a pro-growth policy.

Moody’s placed Hungary’s Baa1 local and foreign currency (Read more about trading foreign currency.
government bond ratings on review, citing increased fiscal risks
after the International Monetary Fund and the European Union
suspended talks over their 20 billion euro ($25 billion)
financing deal with Budapest at the weekend.

Ratings agency S&P said later it had revised its outlook on
Hungary to negative from stable, while affirming its BBB-/A-3
rating, which is already lower than Moody’s.

Prime Minister Viktor Orban, whose centre-right Fidesz party
swept into power in April, has spurned warnings that Hungary
could face market pressure and currency weakness without support
from international lenders.

Orban, whose party holds a more than two-thirds majority in
parliament, has pledged to end the belt-tightening pursued by
the previous Socialist government.

He has his eye on Oct. 3 municipal elections, where he plans
to consolidate his party’s grip on Hungarian politics.

Moody’s said it expected the government to resume talks with
lenders after the municipal vote and that it was likely to
confirm Hungary’s current rating if there was a credible
commitment to the IMF’s previously proposed fiscal targets.

“However, if the new fiscal targets that emerge from the
next round of talks imply a less rapid fiscal consolidation
path, then a one-notch rating downgrade is likely,” it said.

Moody’s told Reuters it would decide within four months
whether to downgrade Hungary. [ID:nSLANIE68W]

Orban has said the government will meet this year’s deficit
goal, specified in the current IMF deal, but will allow the deal
to expire in October, and said Hungary only needed to talk with
the European Union about the 2011 budget.

Asked on Friday if Hungary wanted a new loan from the IMF,
Orban told ATV: “No. The Hungarian economy must be financed from
the market.” [ID:nBUD005425]

He said Hungary’s biggest problem was weak growth.

“In the sphere of the European economy, the position of the
Hungarian economy is currently good. We have a single weakness,
the most painful, and this is low (economic) growth.”

The IMF has said it is open to resuming talks but wants
Hungary to abandon some steps approved by parliament on Thursday
including a bank tax which it says will squeeze lending and
hamper growth, and has called for structural reforms.

Hungarians, worn out by a deep recession last year, appear
to have embraced the government’s tough stance against the IMF
as well as the bank tax, though foreign currency (Read more about trading foreign currency. loan holders
are concerned about the forint.

“There are more important interests than financial,” said
Imre Vida, a pensioner in Budapest. “The prime minister was
right to go to Berlin (to meet Chancellor Angela Merkel) … The
IMF has caused only difficulties, whether we speak about South
America, Africa or eastern Europe.”

DANGEROUS PATH

Analysts have said that Orban, whose government faces no
immediate financing pressure, is likely to soften his rhetoric
after the October vote.

But they have also said Hungary is playing a dangerous game
and may be forced to come back to the IMF if markets turn
negative and the forint falls sharply.

Markets have recovered from sharp falls early in the week
after the breakdown of the talks. After the Moody’s and S&P
warnings on Friday, the forint was down about 1.2 percent at
287.25 to the euro on the day.

Also on Friday, Hungary’s main lender OTP (OTPB.BU: ) and
mortgage bank FHB (FHBK.BU: ) both passed a European stress test
comfortably.

“Hungary can probably survive without a new IMF/EU programme
for the remainder of this year,” said Neil Shearing at Capital
Economics in London. “But we suspect it will eventually be
forced to re-engage with the Fund either later this year or
early in 2011 — and on much stricter terms. In the meantime,
financial markets are in for a rough ride.”

Right after the April election, markets rallied in the hope
that the new government would pursue the deep reforms analysts
had hoped for, as a Reuters poll had shown in February.
[ID:nLDE6192EH]

FX VULNERABILITY

Analysts said the forint would remain volatile because of
uncertainty over the fiscal and policy outlook.

Hungary sold all the bills on offer at a 12-month Treasury
bill auction on Thursday, although yields rose. But analysts
said a 50-billion-forint bond auction next Thursday would be a
better indicator of investor sentiment.

The hundreds of thousands of Hungarian households that have
borrowed heavily in foreign currency (Read more about trading foreign currency., mainly Swiss francs, in
the past years will suffer if the forint weakens further.

Sandor Kovacs, who has a Swiss franc mortgage and has seen
his loan repayments rise continuously because of franc’s recent
strength, said he was worried about the impact on the forint.

“It (forint depreciation) affects me too because I have a
foreign currency (Read more about trading foreign currency. loan, I started off paying 50,000 forints a
month, now I am paying 80,000,” he said.
Stock Market Today

(Additional reporting by Gergely Szakacs, editing by Tim
Pearce)

WRAPUP 3-Ratings agencies threaten Hungary with downgrade