Moody's cuts Budapest's rating to junk due to row with national government

BUDAPEST, Dec 30 (Reuters) - Ratings agency Moody's has downgraded Budapest's credit rating to Ba1 from Baa3 and placed it on review for a further reduction, citing its weak liquidity and a financial dispute with Viktor Orban's national government.

The downgrade comes at a delicate time for Budapest, which is run by the liberal mayor Gergely Karacsony, as nationalist Prime Minister Orban will likely face parliamentary elections in April. The centre-right opposition Tisza party is leading most polls.

"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 late on Monday.

"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."

Moody's put Budapest's rating on review for a further downgrade "to reflect the increased risk of default and the potential acceleration of repayment of the city's long-term debt due to liquidity concerns."

On Facebook, Karacsony said the downgrade was the result of "the government's irrational and narrow-minded tax policy."

Budapest's leadership has been in conflict with Orban's government over the "solidarity tax," a levy the city has to pay to the state. Moody's said the tax rose 31% from a year earlier to 76 billion forints ($231.50 million) in 2024 and is expected to be 89 billion forints in 2025, or 21% of projected revenues.

"Ongoing legal disputes over the tax amount, which exceeds the funding received from the central government, add system instability and jeopardize the budgeting process and cash balances," Moody's said, adding the ratings also reflected the partial freezing of European Union funds to Hungary.

The EU has suspended billions of euros in funds to Hungary over the government's erosion of democratic rights, allegations that Orban denies.

Orban has said the government was ready to throw a financial lifeline to Budapest.

($1 = 328.2900 forints)

(Reporting by Krisztina Than; Editing by Thomas Derpinghaus)