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Originally published Monday, December 6, 2010 at 4:42 AM

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Moody's downgrades Hungarian government debt

Credit ratings agency Moody's downgraded Hungary's government bonds by two notches on Monday, citing worries about public finance policies and exposure to foreign financial shocks, such as the European debt crisis.

The Associated Press

BUDAPEST, Hungary —

Credit ratings agency Moody's downgraded Hungary's government bonds by two notches on Monday, citing worries about public finance policies and exposure to foreign financial shocks, such as the European debt crisis.

Moody's Investor Service said it cut the rating to Baa3 from Baa1 - just one step above junk category - and kept its outlook as negative, meaning more downgrades are possible in the coming three months.

"The government's (financial) strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies," said Dietmar Hornung, Moody's' senior credit officer and lead analyst for Hungary.

The agency has also cut Hungary's rating for foreign-currency debt and bank deposits.

The move lowered Moody's listing for Hungary to the equivalent rating category of Standard & Poor's - BBB- - while Fitch lists the country at BBB, one step higher.

"The move isn't surprising ... as Moody's had acknowledged openly that such a step was due in the near term," said analysts at Equilor Investment Ltd. in Budapest.

Hungary's currency, the forint, weakened by just over 1 percent against the euro and the U.S. dollar on the Moody's announcement, but later recovered slightly.

"While market reaction has been moderate for now ... it's conceivable that foreign investors will turn more cautious for a time, until the issues of the 2011 budget and the private pension funds are settled," Equilor said.

Prime Minister Viktor Orban's center-right government has committed to budget deficit limits set by the European Union but has resorted to unusual methods - including special taxes on banks and energy, telecommunications and retail companies - to reduce the deficit below 3 percent of GDP in coming years.

The government is also planning to fill budget holes with some $13.3 billion (euro10 billion) accumulated on private pension funds. People opting to stay in the private pension scheme instead of transferring their savings and all future contributions to the state system by the end of January will lose 70 percent of their pensions when they retire, Economics Minister Gyorgy Matolcsy said last month.

"Even if the near-term deficit targets are met by means of pension changes, the longer-term implications of the weakening of the private savings scheme are negative for public finances," Moody's Hornung said. "This is because the government will assume responsibility for future pension liabilities in exchange for the inflow from ongoing contributions."

Instead of introducing austerity measures, Hungary is betting that economic growth will accelerate over the next years, boosting investment, creating more jobs and raising tax revenues.

Most analysts, however, say that the strategy is very risky and depends too much on external factors - such as more demand for Hungarian exports from Germany, the country's largest trading partner.

At the same time, Moody's also pointed to some of Hungary's "key strengths," such its EU membership, the high proportion of foreign-owned banks - adding to the resilience of the financial sector - and its ability to attract significant foreign direct investment.

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