HUNGARY - Moody's Investors Service has downgraded Hungary in part because of its decision to nationalise its private pension system.
The government plans to transfer contributions from the private pension sector to the public pension fund until the end of 2011. This will provide consistent revenue for next year while reducing the outstanding debt incurred because of cancelled bonds, said Moody's.
However, it will leave long term implications on the private savings scheme due to pension liabilities being picked up in exchange for the inflow, Moody's warned.
In turn, the foreign-currency debt has been downgraded to A1 from Aa2 and the foreign-currency bank deposits have dropped from Baa1 to Baa3, the nation's lowest investment grade.
Moody's said rising concerns about the medium to long-term fiscal sustainability strongly contributed to the downgrade.
Moody's vice president Dietmar Hornung said: "The downgrade is primarily driven by the Hungarian government's gradual but significant loss of financial strength, as the government's strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies. As a consequence, the country's structural budget deficit is set to deteriorate."
Moody's also said Hungary is vulnerable to the decisions of investors outside its borders as the banking system and private sector carry more external debt than it's peers.
"The government also depends on purchases of its debt issuance by non-resident investors, implying that the maintenance of confidence among foreign investors is vital," the report said.
Moody's warned it may downgrade further if the government fails to stabilise its financial strength which could suffer complications from increased risk aversion in investors or rising financing costs.
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