Moody’s may downgrade Hungary due to the EU dispute

On Sunday, the European Commission announced that in order to conclude the conditionality procedure – this is the official name of the rule of law mechanism – they are recommending to the European Council to freeze 65 percent of the cohesion funds for Hungary. However, the roughly HUF 3,000 billion in EU support would not be blocked, but would be made available if the Orbán government takes measures to combat corruption, make the public procurement system more efficient, and manage conflicts of interest in foundations, and they prove to be sufficient. The news was basically received positively by the markets: it is not actually a withdrawal of resources, but a pilot period.

The government also submitted the necessary draft laws to the Hungarian Parliament on Monday. However, these may not yet satisfy the European Commission.

However, before Friday’s credit rating by Moody’s in its published report seeing these positive developments, but also expects negative prospects. Just three days before the publication of the review, it was indicated that if the European Council loses the funds, or if the review period is extended beyond the end of the year, then the Hungarian government will no longer be able to call on the resources of the credit limit of the recovery and resilience instrument (we wrote about this in detail on Sunday ). All of this represents a significant risk.

Sample Portfolio writes about the report, Moody’s analysts point out that the 7.5 billion euros of resources proposed to be suspended is 4 percent of the annual Hungarian GDP, one third of the entire Hungarian 7-year catch-up framework, and our 7-year framework, viewed together with recovery and other EU funds, is 20 percentage. The credit rating agency expects that, due to favorable interest rates, the Orbán government will call on the EUR 9 billion preferential credit line provided by the recovery fund.

The problem is if there is no settlement

Moody’s base case scenario is that the EU institutions will also accept the Hungarian recovery program by the end of the year, parallel to the deal reached in the rule of law procedure. They consider the risk that the government will not comply with the measures offered to the European Commission to be smaller, because they control the parliament with two-thirds.

They also note that although the European Council should decide on the Hungarian sanctions within a month, by October 18 at the latest, this can be extended by two months in justified cases. This is also seen as a risk that Hungary may suffer a significant loss of EU funds if no agreement is reached between the EU rule of law mechanism and with respect to the RRF.

And this scenario is obviously also a negative risk from the point of view of the credit rating, so it is conceivable that on Friday the previously stable outlook will be downgraded to negative with the Baa2 rating in the case of Hungary.

Source: by

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