S&P cuts Hungary's ratings and keeps negative outlook

Headlines

Currencies: CEE currencies ease on Hungary’s rating downgrade
Fixed Income: S&P cuts Hungary’s ratings and keeps negative outlook

Hungary

S&P downgraded Hungary’s sovereign rating to BBB- from BBB+ and kept the negative outlook citing the political instability and an expected 6% recession. The Hungarian forint plunged to 312 and then recovered to around 310. The new PM’s pledge about a Ft600bn spending cut was not able to improve the sentiment, but market activity also remained normal, thus the likelihood of a capital flee does not seem to be too high. High PPI figure of 8% Y/Y shows that the weak currency could have repercussions for inflation. The January-February rise of producer prices has been the highest since 1997 suggesting that companies are really facing higher costs, which they could try to pass on to customers. There hasn’t been major news about politics. Mr Bajnai seems to get enough support from parties to replace Mr Gyurcsany. The next key data will be this Sunday, when the Socialist party will have to elect him as official PM candidate.

The Hungarian bond market saw yields rising some 20bps across the curve and the short-end seems to have been climbing further this morning. The benchmark 3-year paper is now trading around 13%, way above last week’s low of 12%, but still below the record high level of 14%. We think the bond market could suffer more before yields reach attractive levels again after recent news have worsened the outlook. The money market has added to rate hike expectations and is now looking for 150bps hike to 11%, just tad below the October high of 11.5%.

Czech Republic

The Czech koruna eased yesterday as the S&P credit rating downgrade of Hungary brought selling orders to all CE markets. Hence, the EUR/CZK pair bounced one percent higher and it touched the 27.7 level. Today, the domestic calendar contains just political events as opposition want to push through Parliament several proposals including a bill for blocking the sale of Prague Airport or a Kč 25,000 scrap subsidy, more support for the unemployed, higher income-tax deductions, and a 13th pension payment. Discussing these populist proposals probably will not hurt the koruna immediately, but they represent a threat for the future.

Czech bonds eased as the yield curve flattened a bit. While the front end of the curve was negatively influenced by a weaker koruna, the whole curve suffered form Hungary’s downgrade. Today, the eco domestic calendar is empty, but the political one contains parliamentary session, where several populist measures will be debated. If passed they could widen the budget gab by CZK 40 bn (see the FX part), so in longer run it could be potentially negative for the whole curve.

Poland

The Polish zloty dropped in line with the Hungarian forint on Monday after S&P cut Hungary’s rating to BBB-. The zloty also suffered from the spike in global risk aversion, triggered by rising tensions around General Motors and Chrysler. The pair inched higher above 4.70 EUR/PLN and probably heads towards stronger technical levels around 4.800.

Today some details of the upcoming debt supply should be released in Poland. That comes after the announcement that Polish Finance ministry has selected the group of banks interested in private placements of the bonds, which should assure funding even in the case when the standard auction process might be at risk. Nevertheless these news items are not going to be the magnet of attention. The zloty should continue to track the shaky regional sentiment and may remain under moderate pressure in the upcoming sessions.

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