Nov. 7 (Bloomberg) -- Hungary had its foreign-credit rating cut one step to A3 by Moody's Investors Service, citing strains in the country's ability to service its debt.

The rating is six levels below the highest grade and carries a negative outlook, Moody's said in a statement from New York today. The downgrade comes a day after the International Monetary Fund approved emergency loans that the government says will cover its short-term financing needs.

Hungary's economy is being hurt by the global financial crisis as investors shun emerging markets in favor of safer assets. Government debt increased to 66 percent of Hungary's $138 billion gross domestic product last year, according to the European Union statistics office Eurostat.

``Since the onset of the global liquidity crisis, the country's access to external market-based funding has been much more constrained than previously,'' Moody's said.

The forint fell to 266.34 per euro by 4:55 p.m. in Budapest, from 262.37 late yesterday.

Hungary secured 20 billion euros ($25.5 billion) in loans from the IMF, the European Union and the World Bank to shore up its economy after stocks, bonds and the forint plunged on investor concern the government may face difficulties in financing its debt.

Rising Cost

The debt downgrade is likely to raise the cost of borrowing for the country, which is working toward adopting the euro. Hungary's government and central bank had gross foreign- currency debt of 20.5 billion euros ($26.2 billion) on June 30, Magyar Nemzeti Bank data show.

Fitch Ratings reduced the outlook on the Hungary's debt on Oct. 17, citing ``heightened downside credit risk.'' Standard & Poor's on Oct. 15 put the country on revision for a possible downgrade. Both companies rate the country's credit BBB+, the third-lowest investment grade.

The IMF agreement has improved the country's financing position and is a guarantee ``that economic policies are heading in the direction of international practice,'' Janos Samu, a Budapest-based analyst at Concorde Securities, said in an note to clients.

``The deterioration of the rating is thus a reflection of recent financial volatility rather than a guide to future prospects'' for the economy, Samu said.

Hungary has postponed tax cuts planned for next year to focus on cutting the budget deficit and reduce reliance on external financing. The government projects the shortfall at 3.4 percent of gross domestic product this year and 2.6 percent next year. Earlier estimates were 3.8 percent and 3.2 percent.

The government has managed to reduce the deficit from a record 9.2 percent of GDP in 2006 to 5 percent last year.

Moody's today also cut Latvia's credit ratings and lowered the outlook for Lithuania and Estonia to negative, citing the worsening economic decline and the global liquidity crisis.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net.

Last Updated: November 7, 2008 11:37 EST