Moody’s rating punished Hungary as it lowered country’s foreign and local-currency bond rating by one notch to Ba1. It means that Hungary lost its investment-grade rating after 15 years. Moody’s explained its step by rising uncertainty surrounding the country's ability to meet its medium-term targets for fiscal consolidation and public sector debt reduction as well as increased susceptibility to event risk given external market volatility (driven by the
European sovereign debt crisis). The agency also said it maintained a negative outlook on Hungary’s ratings.
It is worth noting that beside Moody’s, S&P hit the screen too as it maintained its CreditWatch on Hungary's sovereign credit ratings and postponed decision on possible rating action till Hungary reaches deal with IMF, and EU. So, more even bad news might be expected in case of Hungary’s sovereign ratings. And what is the market reaction to Moody’s decision? Although the downgrade is not a complete surprise, its timing is, so it’s clearly a negative news. Thus, Hungarian government bond yields are up about 70bps and market discounts in almost 150bps rate hike. Recall that rate hike bets for next Tuesday seems to support the forint for now, but there is a risk that the central bank will wait before the IMF agreement. If that happens, the forint may see another wave of selling.