The new Hungarian government’s plans to introduce the euro could help offset growing fiscal concerns highlighted by international credit rating agencies and improve the country’s sovereign rating outlook during upcoming reviews, GKI Economic Research Institute said on Thursday.
According to the institute’s latest analysis, progress toward joining the ERM II exchange rate mechanism in the coming months may play a key role in convincing the three major rating agencies—S&P Global Ratings, Moody’s Ratings and Fitch Ratings—to maintain Hungary’s current ratings despite their negative outlooks and give more time for fiscal conditions to improve.
GKI noted that countries must spend at least two years in the ERM II system before adopting the euro, during which the national currency must remain within a fluctuation band of plus or minus 15 per cent. The entry exchange rate is considered particularly important because it can influence the eventual euro conversion rate.
The institute pointed to Slovakia’s example, where the koruna was ultimately converted to the euro at a level around 22 per cent stronger than when it entered ERM II. According to GKI, joining ERM II could strengthen investor and credit rating confidence by signalling macroeconomic stability and demonstrating credible commitment to euro adoption.
The research group said all three major rating agencies could view ERM II membership and eventual eurozone accession positively, particularly because of improved monetary policy credibility, lower external vulnerability and reduced foreign currency debt risks.
This could be especially significant for Hungary’s rating at S&P Global Ratings, where the country currently sits only one notch above non-investment grade status with a negative outlook.
GKI highlighted that S&P’s methodology gives considerable weight to the effectiveness of monetary policy and the exchange rate regime when determining sovereign ratings.
Meanwhile, Moody’s Ratings is expected to focus on institutional and economic policy credibility, areas where progress toward euro adoption could improve Hungary’s standing. The institute also noted that deeper eurozone integration may reduce perceived political and external vulnerability risks.
Under Fitch Ratings methodology, eurozone members receive positive scoring related to reserve currency flexibility, although the agency also closely monitors foreign exchange reserves and financial system stability during the ERM II period.
Referring to a previous European Commission analysis, GKI said credit rating methodologies allow for gradual improvements in sovereign ratings from the point of ERM II accession through to full euro adoption, though membership alone does not automatically trigger an upgrade.
The institute cited the examples of Bulgaria and Croatia, where rating agencies improved outlooks after entry into the eurozone’s waiting room, while Croatia saw a particularly strong improvement in perceptions of its public debt following confirmation of euro adoption.
According to the published review schedules, Moody’s Ratings is due to review Hungary’s sovereign rating on 22 May, followed by S&P Global Ratings on 29 May and Fitch Ratings on 5 June. Autumn reviews are scheduled for 20 November, 27 November and 4 December respectively.
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