Moody's Investors Service on Thursday downgraded Hungary's government bond rating by one notch to Ba1 from Baa3, and is maintaining a negative outlook.

Moody's said in its statement that the first driver of Thursday 's downgrade was the uncertainty surrounding the Hungarian government's ability to meet its targets on fiscal consolidation and public sector debt reduction over the medium term, in view of higher funding costs and the low-growth environment.

Meanwhile, Moody's said that Hungary was vulnerable to external shocks stemming from the government debt structure, which could in turn expose the government to funding cost pressures.

"Moody's believes that the combined impact of these factors will adversely impact the government's financial strength and erode its shock-absorption capacity," said the agency.

"The decision to maintain a negative outlook on Hungary's ratings is driven by the uncertainty surrounding the country's ability to withstand potential event risks emanating from the European sovereign debt crisis," Moody's said.

Moody's also warned that it would consider a further downgrade of Hungary's government debt rating if there is a significant decline in government financial strength due to a lack of progress on structural reforms and implementation of the medium-term plan.

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