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‘Unorthodox Hungary’ and the credit rating upgrade

| June 8, 2016

Following the 2008 financial crisis, investors worried over two European countries: Greece and Hungary. While Greece still struggles, Hungary has found a way out of the terrible spiral of unmanageable deficits and growing debt. The credit rating upgrade by Fitch, long overdue and one that the markets already priced in some time ago, is just another sign that Hungary is on the right track.

Beating the statistics, Hungary was returned to investment grade by Fitch Ratings in May after a four-year hiatus. According to Fitch’s own statistics, it typically takes a country six years on average to return to investment grade after being downgraded. Fitch’s upgrade did not shake the markets much, since Hungary was already doing business, selling bonds and managing its economy with a forward-looking policy anticipating its return to investment grade. Despite the mounting proof of Hungary’s successful but unorthodox measures, credit rating agencies remained cautious and waited until May to upgrade the country.

Following the 2008 crisis, both Hungary and Greece turned to the European Union and the International Monetary Fund for bailouts. In both countries, financial problems led to tectonic political changes. Today, Hungary’s debt-to-GDP ratio is shrinking, GDP is on the rise, the unemployment rate is lower than ever and the trade balance surplus signals a trusted environment. The mess that the socialist-liberal coalitions have left behind in 2010 have been cleaned up. The IMF and EU loans taken by the socialist-liberal coalitions have been repaid, ahead of schedule.

The difference is that after the 2010 elections, Hungary pursued its own path and ignored the one-size-fits-all recipe of the IMF. Hungary was ridiculed and criticized : “taxing banks will cripple recovery”, “investors will leave Hungary”, “this is the beginning of a downward spiral”, etc. When Hungary was still at investment grade in 2011, it was selling state bonds at an interest rate higher than 10 percent. Today, the base interest rate is at 0.9 percent, the GDP and the stock market have reached and even exceeded pre-crisis levels.

Alarmed and puzzled at first, we see Hungary’s once harshest critics, the IMF and credit rating agencies, now following London’s investors and the OECD’s lead, recognizing the long way we have come. A few years ago, Hungary was just another EU Member State on the periphery in dire economic straits. Today, Hungary is a success story.