Budapest Credit Rating Cut to Junk as Funding Dispute With Orbán Government Escalates

Budapest: Budapest has been downgraded to junk status by Moody’s Ratings, a move that underscores growing concerns over the Hungarian capital’s liquidity position amid a deepening financial standoff with the national government led by Prime Minister Viktor Orbán.

Moody’s said it had lowered Budapest’s Baseline Credit Assessment to Ba1 from Baa3, taking the city out of investment-grade territory. The agency also placed the rating on review for further downgrade, citing heightened short-term liquidity risks and institutional uncertainty linked to ongoing disputes with the central government.

In its statement, Moody’s said the action followed disclosures highlighting concerns about the city’s ability to meet all its financial obligations by 31 December 2025, warning that continued pressure on cash flows could lead to another cut if conditions deteriorate further.

The downgrade signals increased credit risk and is likely to raise borrowing costs for the city at a time when access to affordable financing is already constrained. Falling below investment grade also limits the pool of lenders, as many institutional investors are restricted from funding lower-rated borrowers.

Below European peers

Budapest’s Ba1 rating now places it well below most major Western European capitals. By comparison, Paris retains a strong investment-grade rating, while Berlin continues to benefit from top-tier credit assessments reflecting stable finances and strong institutional backing.

Moody’s said the downgrade does not imply excessive debt or poor long-term fundamentals, but rather reflects acute liquidity stress combined with political and institutional tensions that reduce budget predictability.

Funding row with central government

The city’s liberal mayor, Gergely Karácsony, has been locked in a prolonged fiscal dispute with the ruling Fidesz government, accusing it of cutting state transfers and withholding funds legally owed to the capital.

Karácsony has said state financing for local governments was reduced by around 20% nationwide, with Budapest facing cuts closer to 30%, significantly reducing automatic transfers under Hungary’s funding system. He has also alleged delays in payments for agreed infrastructure projects, including the renovation of the Chain Bridge and the purchase of new trolley buses.

Another major point of contention is the solidarity contribution, a levy paid by wealthier municipalities to support poorer regions. According to the mayor, the amount Budapest must pay has increased sharply, reaching 89 billion forints (€230.5 million) this year, further squeezing city finances.

The national government disputes the city’s account, arguing that Budapest, as Hungary’s wealthiest region, should contribute more to support less affluent municipalities. Prime Minister Orbán has said the state is prepared to assist the capital if necessary, but only after Budapest formally acknowledges a risk of insolvency—an option city leaders reject, saying it would place their finances under central government control.

Liquidity pressure outweighs improvements

A review by Hungary’s State Audit Office earlier this year acknowledged that the city’s financial position has worsened since 2020 due to the pandemic, rising energy costs, inflation, and increased budgetary obligations imposed by the government.

Despite this, Moody’s noted some improvements. Budapest’s debt burden has fallen significantly, declining to 35% of operating revenue in 2024 from 71% in 2021, and the city recorded a primary operating surplus of 13% last year.

However, the agency said these strengths are outweighed by very low liquidity, political tensions with the central government, and uncertainty over the timing of state transfers, all of which increase the risk of short-term payment stress.

Moody’s also pointed to the partial freezing of EU funds to Hungary and the lack of approval for new long-term borrowing as additional constraints on the city’s financial flexibility.