Moody's lowers city of Budapest's rating to junk

Moody's cut the city's credit rating from Baa3 to Ba1, a category with high risk often described as speculative or junk grade.

The move comes as Hungary is expected to hold parliamentary elections in spring, where Orban's 16-year-rule will be put to a test as the opposition TISZA party has been leading in independent polls.

The downgrade follows repeated warnings by Budapest's environmentalist mayor Gergely Karacsony -- an outspoken critic or Orban -- who said the city of 1.6 million faces the threat of insolvency.

"The action follows the disclosure of Budapest's liquidity position highlighting concerns about the city's capacity to repay all of its obligations as required by 31 December 2025," Moody's said in a statement on Monday night.

"Uncertainty around the timing and receipt of ordinary transfers, together with very weak liquidity to absorb unexpected cash flow gaps, materially increases the city's near-term credit risk," it said.

Moody's said it placed Budapest's rating on review for a further downgrade "to reflect the increased risk of default".

The rating agency added it would consider further downgrading the rating "if strained relations with the central government were to continue, forcing us to reassess our assessment of Budapest's operating environment, governance or likelihood of extraordinary support."

Karacsony blames the government for the city's financial problems, saying it has significantly increased levies and withheld promised funds.

He has repeatedly accused Orban of bleeding the capital and other large municipalities dry to prevent them from providing an alternative model of governance.

Orban's ruling party however alleges the mayor's "irresponsible spending" caused the city's financial troubles.

In a post on Facebook on Monday, Karacsony said the government's "senseless and petty tribute policy" has been pushing the "nation's capital into bankruptcy".

He also blamed the downgrade on the government not reaching a "reasonable financial agreement" with the capital.

Earlier this month Hungary's parliament passed a bill, which could force Budapest to borrow money under unclear conditions and would make the mayor criminally liable for potential breaches.

There was no immediate reaction from the government to Moody's decision.

The Hungarian capital is required to pay so-called solidarity contributions to the central government.

These have increased almost nine-fold since Karacsony was elected mayor in 2019, and amounted to about one fifth of the capital's revenues this year.

The municipality has filed multiple lawsuits in recent years that argue the tax is unconstitutional.

The government has justified the contributions by saying it needs to redistribute funds from wealthier cities to financially weaker municipalities.