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Citing increasing unpredictability in government policy, Standard & Poor's surprised with its timing on November 23 as it announced a further downgrade for Hungary's credit rating. Shocking nobody, Budapest was quick to damn the move, calling the ratings agency a "lobby institution of speculators".

Late in the day, S&P lowered its long-term foreign and local currency sovereign credit ratings to 'BB' from 'BB+', saying "the predictability of Hungary's policy framework continues to weaken, which could affect the country's medium-term growth prospects." The outlook remains stable. It also lowered its long-term counterparty credit rating on the National Bank of Hungary to 'BB' from 'BB+'.

The move hit the forint, nudging it lower against the euro. However, given that the announcement came around banking close, analysts expect Hungarian assets to drop further as the week opens.

Hostile attitude

S&P's move may not have been predicted to happen now, but it's hardly out of the blue. The Hungarian government has exhibited an increasingly hostile attitude in the weeks since the International Monetary Fund (IMF) said that it will not be returning to Budapest this year to discuss a bailout.

The banks have been hit in particular, with the country's special tax on the sector extended twice in recent austerity packages. They are also nervous ahead of the government's announcement of its plans for HUF612bn in municipal debt that it is set to consolidate. Speculation says Budapest is likely to insist on a haircut of up to 25%.

Just ahead of the IMF announcement in October that it won't be back for more talks in 2012, both Fitch Ratings and Moody's Investors Service warned Budapest that it should not try to go it alone without the international lender. The prospect of a loan programme, and associated return of "orthodox" policymaking, has been keeping the market off Hungary's back for the past year, and continues to protect yields and the currency despite the hiccups.

S&P's downgrade makes little formal difference. Hungary has been in junk territory for close to a year now at all three of the major agencies. However, it bumps the EU state a notch further from investment grade, putting it on a level with the likes of Macedonia and Serbia.

The move also crystalizes the likelihood of a second downgrade in the near term from Fitch, which is the only one of the agencies to have publicly suggested the move is on the cards. It said early last week that it is set to review its rating before Christmas. Analysts at Erste say that while Fitch and Moody's may make similar steps in the upcoming weeks, "we do not think that a strong negative market reaction will come in the days ahead if the external sentiment does not worsen too much."

The resumed pressure on the country's banks, and the effect of that on their propensity to lend, is clearly the main issue for the ratings agencies. Indeed, for the first time, one of the major banks said on November 23 that it could leave due to the rising tax burden and other one-off effects on the sector. Herbert Stepic, CEO of Raiffeisen Bank International, said he fears massive write-offs on municipal debt, and that RBI could leave, despite its desire to stay in Hungary.

S&P said in its announcement: "The downgrade reflects our opinion that the government's unorthodox policies, including exceptional measures applied to the financial sector, could erode the country's medium-term growth potential... This could eventually undermine the government's efforts to sustainably reduce general government debt."

Harsh words

The reaction of the Hungarian Economy Ministry was predictably apoplectic, insisting that the agency should "downgrade itself," reports portfolio.hu. As it tells every critic, the government said the decision does not properly reflect the economy's fundamentals. Last year, it complained that it should be upgraded due to a budget surplus of close to 5%. Analysts retorted by pointing out that without the €10bn or so co-opted from the private pension system, it would have been close to a 5% deficit.

This time, Hungary complains that it deserves better due to a deficit healthy by relative standards in 2012. "Despite the results it acknowledged, S&P tries to rank Hungary among countries none of which has a budget deficit of less than 3% of gross domestic product, has its public debt on a declining trend, and its current account has a surplus. Based on all this, it's time that (S&P), a lobby institute of the speculators, downgrade itself," the ministry said, according to Dow Jones. However, most analysts predict that the deficit will move well out again in 2013.

As well as the Balkan states mentioned, the downgrade puts Hungary on the same level that S&P rates Turkey. That may be quite fitting some suggest, given that Budapest has long been suspected of "doing a Turkey" - ie. pretending to chase an IMF bailout to keep the markets off its back without any real intention of agreeing a deal. "It seems that S&P was just as bored as the market in waiting," writes Peter Attard Montalto of Nomura in a note.