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Hungary and IMF agree on rescue package - extended

The International Monetary Fund (IMF) says it has reached broad agreement on an economic rescue package for Hungary. EBRD supports accord between Hungary and IMF.

Hungary turned to the International Monetary Fund for help in order to help shore up its falling currency and financial markets and shield the country from the global financial crisis.

Hungary has reached agreement with the International Monetary Fund and European Union on a broad economic rescue package, including substantial financing, to stabilize its economy rocked by the global financial crisis, the IMF said on Sunday. “A substantial financing package in support of these strong policies will be announced when the program is finalized in the next few days,” IMF Managing Director Dominique Strauss-Kahn said in a statement that did not indicate the size of the package. “Participants will include the IMF, the EU, and some individual European governments, together with regional and other multilateral institutions,” he added. He said the package would help to bolster the Hungarian economy's near-term stability and improve its long-term growth potential. “The authorities' program will ensure fiscal sustainability and strengthen the financial sector,” he added.

Hungary had lined up potential financial help from the IMF and the European Central Bank earlier this month after foreign investors dumped Hungarian assets, its currency plunged and the government bond market froze up on worries over the country's large external financing need. Hungary, which is a member of the European Union, has been in talks with the Washington-based global lender since early October to try and restore confidence in falling markets.

 

The IMF said it will give details on how much funding Hungary is getting “in the next few days,” but Bank of America analyst David Hauner said it would probably receive around $12.5 billion. – Forbes  reported Monday.

Analysts said the deal could boost sentiment in the short-term and may force the Hungarian government to implement further fiscal tightening and some structural measures to contain state spending.

 

WHAT DO WE KNOW ABOUT THE DEAL?

* The IMF and the Hungarian authorities, in close consultation with the European Union, have reached broad agreement on a set of policies to bolster the Hungarian economy’s near-term stability and improve its long-term growth potential. The program will ensure fiscal sustainability and strengthen the financial sector, the IMF said.

* A “substantial financing package” to support these policies will be announced when the program is finalized in the next few days, IMF chief Dominique Strauss-Kahn said.

* Participants will include the IMF, the EU and some individual European governments, together with regional and other multilateral institutions.

* The IMF’s assistance, in the form of a stand-by arrangement, will be considered by the IMF’s executive board for approval. The IMF said the policies Hungary envisages justify “an exceptional level of access to Fund resources.”

* The size of the IMF package is not known yet.

 

IS THE DEAL GOOD NEWS?

* Analysts said the deal could boost market sentiment in the short term, and may help prevent further capital outflow.

István Zsoldos, analyst at Goldman Sachs in London: “Potentially this (package) could be on the large side, considering the Ukraine deal. It would probably boost sentiment in the short term.” “There is a potential self-fulfilling element in all of these crises, because sentiment deteriorates, which induces further capital outflow, making financing even more difficult.” “The IMF package would be an important tool to combat this self-fulfilling spiral.”

JPMorgan’s Nóra Szentiványi in a note dated October 24: “The IMF has also agreed to provide help if needed, and we estimate that Hungary could borrow up to $12 billion from the fund under the supplementary reserve facility. Those funds, coupled with FX reserves of $23 billion, would be more than sufficient to cover Hungary’s short-term external debt.”

 

WHY DOES HUNGARY NEED HELP?

* Hungary is seen as one of the most vulnerable countries in eastern Europe to the global credit crunch due to its large debt, reliance on external financing and large-scale foreign exchange borrowing in the past few years, though analysts say its situation is in many aspects different from that of Iceland.

* Earlier this month ratings agency Fitch cut Hungary’s outlook to negative from stable, citing downside credit risks, shortly after Standard & Poor’s put the country’s credit ratings on review for a possible downgrade.

* After a foreign currency lending boom, over half of bank lending to the private sector is in foreign currencies, and nearly 90% of all new household loans are in foreign currencies, mainly in Swiss francs and euros.

Western European parent banks will likely reduce FX lending to their subsidiaries and several banks have already restricted or suspended FX lending as banks have difficulties in hedging these exposures in international money markets.

* While the debt management agency has stressed the state’s financing is secure for the rest of the year, Hungary will need to keep financing its large external debt and its deficit next year.

* Excessive forint weakening would increase the loan repayments of households and may increase the risk of more Hungarians having difficulties with repayments.

 

WHAT KEY MEASURES HAS HUNGARY TAKEN SO FAR?

* The central bank hiked the benchmark base rate by 300 bps to 11.50% as of October 22 and made it clear that it was prepared to defend the forint.

* The central bank has signed a €5 billion FX swap line with the European Central Bank (ECB)

* It has also launched auctions where it buys government bonds in order to boost the bond market

* The government has announced additional fiscal tightening for 2008 and 2009 and said it had agreed with commercial banks about measures to shield FX borrowers from excessive forint weakening.

 

The European Bank of Reconstruction and Development (EBRD) welcomed international moves to help Hungary to weather the current financial market turmoil and an agreement in preparation with the IMF in a statement released on its website on Monday.

The following is the text of the EBRD statement:

“The EBRD welcomes the international efforts to support the Hungarian economy to weather the current turbulent conditions in the international financial markets. The outline program which has now been agreed with the IMF provides a strong basis for confidence in the country’s financial framework. The Hungarian Government embarked on the path of fiscal consolidation in 2006 and has demonstrated its sustained commitment to it.

Under the current market conditions the EBRD is committed to working with all relevant parties to continue supporting a sound Hungarian financial sector. The Bank will, on a case by case basis, assess the financing and capital needs of its partners in the country and will work with them to strengthen balance sheets.

Since the start of its operations in Hungary in 1991 the EBRD has invested close to €2 billion in more than 100 projects in all sectors of the country’s economy. The Bank has been playing a major role in promoting and supporting Hungary’s transition to a market economy and remains fully committed to the country and the region.” (Reuters, MTI-Econews)