Moody’s cuts Budapest rating to 'junk' as dispute with Orbán deepens

The city of Budapest has been cut to junk status by Moody’s, a leading global credit rating agency, in a ratings action that explicitly links the Hungarian capital’s short-term credit risk to liquidity pressure and an ongoing institutional dispute with the national government.

"Moody's Ratings has today downgraded the City of Budapest's Baseline Credit Assessment to ba1 from baa3 and long-term issuer ratings (foreign and domestic) to Ba1 from Baa3. At the same time, the ratings have also been placed on review for further downgrade," the agency said in a statement.

Budapest’s downgrade to Ba1 takes the city out of investment-grade territory, signalling higher short-term credit risk and potentially raising borrowing costs.

By contrast, other European capitals sit comfortably in investment grade: Paris’s long-term issuer credit rating is A+/A-1 and Berlin’s local-government long-term issuer rating is rated AAA by Fitch and Scope and Aa1 by Moody’s, reflecting very low credit risk and strong institutional support.

Budapest’s Ba1 rating therefore places it below most large Western European municipal peers, indicating that under current conditions Moody’s sees it as more exposed to uncertainty — rather than having the stronger, more predictable credit profiles seen in Paris and Berlin.

Budapest’s liberal mayor Gergely Karácsony and Hungary’s ruling Fidesz party have been locked in a bitter fiscal dispute that has directly affected the city’s cash flow.

Karácsony has repeatedly accused the national government of reducing state transfers and redirecting funds away from the capital since he took office, claiming that state financing for local governments was cut by about 20% on average and that in Budapest’s case it was cut by around 30%, meaning less money was automatically transferred under the usual funding system.

He has also said the government failed to pay funds the city was legally due — for example, agreed subsidies for projects like the renovations for the capital's iconic Chain Bridge or new trolley buses — which has squeezed the city’s finances.

Karácsony also said that the amount the city is required to pay in so-called solidarity contributions — a levy Budapest pays to the central budget — has been increased sharply and used to offset funds that were previously earmarked for local government purposes, leaving the city with even less revenue than expected.

The Solidarity Contribution Tax was introduced in Hungary in its current form in 2019 with the purpose of ensuring that wealthier municipalities with higher revenues contribute to supporting poorer municipalities facing more difficult financial situations.

The amount of the contribution is based on the tax revenues and other income of local governments. The higher their revenues, the higher the amount they have to pay into the central budget.

The government disputes the city’s account, with Prime Minister Viktor Orbán accusing Budapest’s opposition leadership of financial mismanagement and arguing that, as Hungary’s wealthiest region, the capital should shoulder higher solidarity levies to support poorer municipalities.

Orbán has said the state is prepared to provide “all help” to Budapest, including covering public-sector wages if necessary, but only after the city formally acknowledges a risk of insolvency — a step city leaders say would place their finances under central government control.

Over the summer, the capital’s leadership agreed to have the State Audit Office (ÁSZ) review the city’s operations, the results of which were published in September.

The ÁSZ acknowledged that from 2020 onwards, in addition to the economic difficulties caused by the Covid-19 pandemic, the surge in energy prices and the rising inflation, the increased budgetary payment obligations imposed by the government also contributed to the capital's steadily worsening financial situation.

The biggest burden among these is the solidarity contribution Karácsony has contested for years and which has gradually grown to 89 billion forints (€230.5mn) this year.

Earlier in December, during a meeting of the city council, Karácsony said they would “not kneel before the government and kiss their hands to get our money back."

The standoff with the central government could lead the capital to closing the year with a deficit of 33 billion forints (€85.5mn) which would result in an unlawful situation. Under Hungary’s public finance system, municipalities are not allowed to run ongoing deficits in the way national governments do.

This rule was deliberately tightened after the 2010–2014 period, when many local governments accumulated large debts that the state later had to bail out. Since then, Hungarian law has been based on a “balanced budget” principle for local authorities, insisting that cities must only commit to spending they can fully cover with guaranteed revenue or approved borrowing.

Any borrowing beyond routine cash management requires explicit approval from the central government.

Budapest’s leadership argues that the deficit risk arises not from overspending, but from delayed or withheld state transfers and rising compulsory payments to the central budget, combined with the fact that the city cannot borrow freely without government approval.

Moody’s is not saying that Budapest is being downgraded because it is badly run or deeply in debt, but because it may run short of cash at the wrong moment — and that this risk is made worse by its conflict with the national government.

With less cash on hand and no guarantee of when state money will arrive, Moody’s believes there is a higher risk that Budapest could struggle to pay its bills on time in the near future.

Moody’s also placed the rating on review for further downgrade, warning that continued liquidity pressure or failure to repay an overdraft by the end of 2025 could trigger another ratings cut.

"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," the statement said.

When a city falls out of investment-grade credit status, fewer lenders and investors are willing or allowed to provide funding.

Many large institutions — such as pension funds and insurers — have internal rules that prevent them from lending to or investing in lower-rated borrowers. Others may still lend, but only at higher interest rates or on stricter terms.

Despite the downgrade, Moody’s noted that Budapest’s debt burden has fallen sharply, reaching 35% of operating revenue in 2024 from 71% in 2021, and is expected to decline further.

The city also recorded a primary operating balance of 13% in 2024. However, the agency said these strengths were outweighed by “political tensions with the central government,” resulting in very low liquidity and reduced budget predictability.

The ratings also reflect the partial freezing of EU funds to Hungary and the absence of approval for new long-term borrowing by the city.