FRANKFURT (MNI) – Moody’s Investors Service announced Friday that
it is putting Hungary’s Baa1 local and foreign currency government bond
ratings on review for possible downgrade. The decision was prompted by
elevated uncertainty regarding the country’s fiscal outlook and economic
prospects, Moody’s said.

The uncertainty is a result of the recent breakdown of Hungary’s
talks between the IMF and the EU, Moody’s explained. Moody’s also placed
the National Bank of Hungary, the country’s central bank, foreign
currency bond rating on review for possible downgrade.

The following is the full text of Moody’s press release:

Frankfurt, July 23, 2010 — Moody’s Investors Service has today
placed Hungary’s Baa1 local and foreign currency government bond ratings
on review for possible downgrade.

Moody’s decision to initiate this review was prompted by the
increased uncertainty regarding Hungary’s fiscal outlook and economic
prospects. This uncertainty is the result of the recent breakdown of
Hungary’s talks with the IMF and EU (after a disagreement over the
country’s 2010-11 fiscal deficit targets), which in turn led to a
suspension in the next disbursement from the IMF/EU EUR20 billion loan
programme for Hungary.

In a related rating action, Moody’s also placed Hungary’s Baa1
foreign currency bank deposit ceiling on review for possible downgrade.
This ceiling reflects the risk that the Hungarian government would
freeze foreign currency deposits to conserve scarce foreign currency
resources during a crisis. The outlook on Hungary’s Aa2 country ceiling
for foreign currency debt remains stable. This is generally the highest
rating attainable by an issuer of foreign currency debt domiciled in the
country.

Moody’s also placed the Baa1 foreign currency government bond
rating of the National Bank of Hungary (NBH) on review for possible
downgrade.

RATIONALE FOR REVIEW

While Moody’s acknowledges the Hungarian economy’s macroeconomic
and fiscal adjustments (as reflected in current account and primary
budget surpluses in 2009), the rating agency believes that the country’s
economy remains vulnerable because of the high foreign-currency
indebtedness of both its private and public sector. Consequently, market
confidence in both the government’s fiscal consolidation programme and
the value of its currency are considered very important.

“The failed talks between the IMF/EU and Hungary’s government about
the country’s loan programme — which represents a crucial policy anchor
for Hungary — has increased uncertainty about the authorities’
determination to restore fiscal sustainability in the near term,” says
Dietmar Hornung, a Moody’s Vice President – Senior Credit Officer and
lead analyst for Hungary. By espousing fiscal deficits above those
recommended by the IMF and EU, Moody’s believes that the Hungarian
government has increased the uncertainty over whether its debt
affordability will stabilize within the next two to three years.

Moody’s also says that the suspension of talks with the IMF/EU is
clouding Hungary’s economic growth prospects by exerting downward
pressure on its currency and upward pressure on funding costs. The
rating agency believes that the NBH may be forced to raise policy
interest rates out of concern over the impact of exchange rate
depreciation on the foreign debt-servicing costs of both public and
private sector borrowers. For the NBH, this issue would likely outweigh
concerns that higher interest rates might restrain economic growth.

In addition, Moody’s says that the government’s planned bank levy
represents a further potential drag on economic activity as it could
negatively affect banks’ credit provisioning and the country’s
investment climate. Such a levy could also prompt foreign banks to scale
back their Hungarian operations.

FACTORS TO BE CONSIDERED IN THE REVIEW

The review of Hungary’s sovereign ratings will focus on the ability
and willingness of the Hungarian government to formulate a coherent
reform agenda that could stabilize economic strength generally, and the
government’s financial strength specifically, in a difficult economic
environment.

In this context, the progress and substance of an expected
resumption of discussions between the Hungarian government and the
IMF/EU will be a key consideration in Moody’s ratings review. “Moody’s
expects the Hungarian government and the EU and IMF to come to an
agreement following the local elections (scheduled for 3 October), as
all sides are aware of the negative consequences of a complete breakdown
in the programme,” adds Mr. Hornung. “Moody’s will examine the specifics
of the fiscal aspects of the agreement in order to assess whether the
government’s debt affordability will indeed stabilize.”

The rating agency is likely to confirm the country’s current rating
if there is a credible commitment to the IMF’s previously proposed
fiscal targets and if other macroeconomic indicators remain positive.
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. Although a multi-notch downgrade is
unlikely, Moody’s says that this could be prompted by a lengthy impasse
in programme negotiations, which would likely have adverse exchange rate
and interest rate consequences.

PREVIOUS RATING ACTION & METHODOLOGY

Moody’s last rating action on Hungary was implemented on 31 March
2009, when the rating agency downgraded Hungary’s local and foreign
currency government bond ratings to Baa1 from A3 and maintained a
negative outlook. The last rating action on Hungary prior to that was
taken on 7 November 2008, when Moody’s downgraded Hungary’s local and
foreign currency government bond ratings to A3 from A2 and assigned a
negative outlook.

Moody’s last rating action affecting National Bank of Hungary (NBH)
was implemented on 1 July 2010, when the rating agency corrected the
NBH’s foreign currency bond rating to Baa1 from A1, aligning the rating
with the government’s foreign currency bond rating. The Republic of
Hungary is legally responsible for the payments on the bonds that are
currently outstanding.

The principal methodology used in rating the government of Hungary
and the National Bank of Hungary is Moody’s “Sovereign Bond Ratings”,
which was published in September 2008 and can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research & Ratings
tab. Other methodologies and factors that may have been considered in
the process of rating this issuer can also be found in the Rating
Methodologies sub-directory on Moody’s website.

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