labels: International Monetary Fund, World Bank
Hungary receives $25.1 billion from IMF, EU, World Bank news
03 November 2008

One of the most prosperous emerging European countries, Hungary, became the first EU nation in the current global financial crisis to receive a massive combined $25.1-billion bailout from International Monetary Fund (IMF), the European Union and the World Bank.

Some commentatore feel the amount it has received is in excess of what the country needs, as it struggles to confront a huge budget deficit, a large external debt in various foreign currencies and face a possible prospect of recession next year.

Prime Minister Ferenc Gyurcsany Hungary, which joined the European Union in 2004, was able to secure an IMF loan of $15.7 billion to be disbursed over 17 months, while the EU agreed to give $8.1 billion and the World Bank an additional $1.3 billion.

As each IMF member is assigned a quota, which is based on its size in the world economy, Hungary is getting 10 times more than its IMF quota and above the limit of three times the quota for countries seeking to borrow.

EU said that its contribution of $8.1 billion would be raised on financial markets through the issue of EU bonds instead of funds from the EU budget as the European commission is thinking of doubling the EU emergency funding to struggling countries from 12 billion to 25 billion by raising money on the markets through bond issues.

The former communist country saw its public deficit soar to a record high of 9.2 per cent in 2006 and the crisis came as a bolt from the blue as Hungary was seen as a prosperous emerging European country with a robust overseas investment due to its currency-the forint, moving towards adopting the euro.

Since Hungary got a surge of large foreign direct investment it took a course of rapid but steady growth, but its economy took a pounding as its banking system heavily exposed to foreign financing saw investors pulling out their money from developing economies and parking it in developed countries where huge bailouts were doled to ease the credit squeeze.

The central bank of Hungary increased the interest rates by 3 per cent to 11.5 per cent last week in an effort to reverse the flow of money abroad and to boost the forint with little success thereby forcing the country to seek international help immediately lest it go bankrupt.

It currency, the forint, was introduced in 1946 when its previous two currencies, the korona and the pengo had to be literally dumped as it became worthless due to high inflation, and was being swept in to gutters when its Hungarians.

With a strong forint and high interest rates, many Hungarians resorted to take mortgages in foreign currency loans and 60 per cent of loans to local companies were in various foreign currencies as also a 30 per cent public debt also in foreign currency and with Hungary facing saw a huge budget deficit saw its assets taking a beating making the robust forint sink as the global financial crisis spread resulting in a credit crunch.

IMF managing director Dominique Strauss-Kahn said the loan would ''bolster the economy's near term stability and improve its long-term growth potential.''

''At the same time, it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets,'' he added.

Orsalia Kalantzopoulos, World Bank director for Central Europe and the Baltic countries said at a news conference that the World Bank's pledge of $1.3 billion would support the design and implementation of reforms in key areas, such as the financial sector, fiscal management, and social sector reforms.

This IMF loan of $15.7 billion to Hungary comes close on the heels after it pledged to bailout Iceland from near bankruptcy with a $2-billion loan (See: IMF approves $2-billion loan for Iceland) and arrived at a tentative agreement to give $16.5 billion loan to Ukraine. (See: IMF bails out Ukraine with a $16.5 billion loan)

But as usual strict conditions were applied on Hungary for availing the IMF loan wherein the monetary agency would make sure that it took steps to reduce its fiscal deficit, meet inflation targets and ensure there were sufficient foreign currency reserves at its central bank.

Hungary has also agreed to cut welfare spending and freeze salaries and cancel bonuses for public sector workers in an attempt to reduce next year's budget deficit to 2.6 per cent of gross domestic product.

The IMF loan to Iceland and Ukraine was on the condition that it would further market reforms among other stipulations for their loans with Iceland being forced to raise interest rates by six per cent to 18 per cent by the IMF.

Hungary's prime minister, Gyurcsany wrote in an article on his personal internet blog that although Hungary's imminent financial collapse had been averted, the people should be prepared to face a long and painful downturn as everyone will be hit by the crisis.

He also wrote that there was a possibility of the country getting into recession next year as the economy could contract by as much as 1.0 per cent.

He said that the people would have no choice but to tighten their belts as spending on public sector wages and bonus would freeze.

The IMF is now in talks with Pakistan to help it out of its economic crisis (See: Pakistan seeks IMF help and Belarus is close to clinching a deal with the IMF.

The IMF has about $250 billion on hand to help nations in financial trouble has already pledged $34.3 billion collectively to Iceland, Ukraine and Hungary and with many more nations likely to knock on the doors of the IMF, the $250 billion will be insufficient to service countries like Pakistan, Belarus and countries likely to avail of the IMF loan includes Estonia, Latvia, Lithuania, Turkey, Bulgaria, Romania and Brazil and Sri Lanka.

UK Prime Minister Gordon Brown, French President Nicolas Sarkozy and IMF first deputy managing director John Lipsky have appealed to China and the oil rich Gulf states to contribute to the IMF fund as the $250-billion, which the IMF has earmarked to bail out countries in distress may not suffice, as more countries are expected to be forced to seek its financial help in wake of the global financial turmoil. (See: EU urges China, Gulf States to fund IMF)

China has said that any infusion of extra money into the IMF should be accompanied by more votes which have been a thorn with the emerging powers like Russia, China and India as the IMF has always been dominated by the US and certain European powers.

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Hungary receives $25.1 billion from IMF, EU, World Bank