The city of Budapest has been cut to junk status by Moody’s, a leading global credit rating agency, in a rating 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 today downgraded the Base Credit Assessment of the City of Budapest to ba1 from baa3 and long-term issuer ratings (foreign and domestic) to Ba1 from Baa3. At the same time, the ratings were also 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, indicating higher short-term credit risk and potentially raising borrowing costs.
In contrast, other European capitals sit comfortably at investment grade: Paris’ long-term issuer credit rating is A+/A-1 and Berlin’s long-term local government 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 funding for local governments has been reduced by an average of around 20% and that in the case of Budapest it has been reduced by around 30%, meaning less money has been transferred automatically under the usual funding system.
He also said that the government failed to pay funds that the city was legally owed – for example, agreed subsidies for projects such as renovations to the capital’s iconic Chain Bridge or new trolley buses – which squeezed the city’s finances.
Karácsony also said that the amount that the city is required to pay in so-called solidarity contributions – a levy that Budapest pays to the central budget – has increased sharply and used to offset funds that were previously allocated for local government purposes, leaving the city with even less income than expected.
The Solidarity Contribution Tax was introduced in Hungary in its current form in 2019 with the aim of ensuring that wealthier municipalities with higher incomes contribute to support poorer municipalities facing more difficult financial situations.
The amount of the contribution is based on the tax revenue and other income of the local governments. The higher their income, the higher the amount they have to pay in the central budget.
The government disputes the city’s bill, with Prime Minister Viktor Orbán accusing Budapest’s opposition leadership of financial mismanagement and arguing that, as Hungary’s wealthiest region, the capital should bear higher solidarity levies to support poorer municipalities.
Orbán said the state is ready to provide “all help” to Budapest, including covering public sector wages if necessary, but only after the city formally acknowledges the risk of insolvency – a step that city leaders say would put their finances under the control of the central government.
During the summer, the leadership of the capital agreed that the State Audit Office (ÁSZ) review the city’s operations, the results of which were published in September.
The ÁSZ recognized that from 2020 onwards, in addition to the economic difficulties caused by the Covid-19 pandemic, the increase in energy prices and the increase in inflation, the increase in budgetary payment obligations imposed by the government have also contributed to the financial situation of the capital which is getting worse.
The biggest burden among these is the solidarity contribution which Karácsony has been contesting 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 that “he will 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 close the year with a deficit of 33 billion forints (€85.5mn) resulting in an illegal situation. Under Hungary’s public finance system, municipalities are not allowed to run continuous deficits in the way that national governments do.
This rule was deliberately tightened after the period 2010–2014, 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 should only commit to spending that they can fully cover with guaranteed income or approved loans.
Any loans beyond routine cash management require explicit approval from central government.
Budapest’s leadership argues that the risk of a deficit arises not from overspending, but from delayed or withheld state transfers and rising mandatory payments to the central budget, along with the fact that the city cannot borrow freely without government approval.
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Moody’s is not saying that Budapest is being downgraded because it is mismanaged or deeply in debt, but because it could run out of cash at the wrong moment — and that this risk is exacerbated by its conflict with the national government.
With less cash and no guarantee of when the state money will arrive, Moody’s believes there is an increased risk that Budapest may struggle to pay its bills on time in the near future.
Moody’s also put the rating on review for a further downgrade, and warned that continued liquidity pressure or failure to repay an overdraft by the end of 2025 could cause further downgrades.
“The action follows the disclosure of Budapest’s liquidity position which highlights concerns about the city’s ability to repay all its obligations as required by December 31, 2025,” the statement said.
When a city falls from the credit status of investment grade, fewer lenders and investors are willing or allowed to provide financing.
Many large institutions — such as pension funds and insurers — have internal rules that prevent them from lending or investing in lower-rate borrowers. Others can still lend, but only at higher interest rates or with stricter terms.
Despite the downgrade, Moody’s noted that Budapest’s debt burden has fallen sharply, reaching 35% of operating income in 2024 from 71% in 2021, and is expected to continue to decline.
The city also recorded a primary operating balance of 13% in 2024. However, the agency said these strengths were outweighed by “political tensions with 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 lack of approval for new long-term loans from the city.
