Hungary Sovereign Debt Insurance Costs Rise After Downgrade
LONDON -- The cost of insuring Hungarian debt against default rose sharply Thursday after Standard & Poor's Corp. became the second ratings firm in less than a month to cut the country's credit rating to junk status on concerns over government policy and the impact that could have on growth.
Hungary's five-year credit default swaps pushed 28 basis points wider to 596 basis points, according to data-provider Markit.
As CDS are derivatives that function like a default insurance contract for debt, this means it now costs of average $596,000 a year to insure $10 million worth of debt sold by the country.
"The downgrade reflects our opinion that the predictability and credibility of Hungary's policy framework continues to weaken," Standard & Poor's said in a statement accompanying the one-notch downgrade to double-B-plus, the highest rating in junk territory.
"We believe this weakening is due, in part, to official actions that, in our opinion, raise questions about the independence of oversight institutions and complicate the operating environment for investors."
The outlook on the rating is negative, which means there is one-in-three chance of another downgrade in the next year if fiscal or external performance deteriorates, S&P said.
Last month, Moody's Investors Service Inc. cut Hungary to junk status citing uncertainty in meeting fiscal-consolidation targets and public sector debt-reduction goals.
Ratings peer Fitch still rates Hungary as investment grade, although many market participants widely expect them to cut soon.
"Hungary has now lost two of its three investment grade ratings and one should not be surprised if Fitch were to follow suit soon," Barclays Capital said in a note to clients.
Hungary's economy was one of the hardest hit in the region by the global slowdown, which helped to usher in the election of a more conservative governing party in 2010.
In April, the parliament approved a new constitution that--among other things--restrained the constitutional court's authority over taxation and budget, despite criticism from the European Union and United Nations.
(Dow Jones)
***
OT.