Hungary Pays With Growth Prospects for IMF-Led Bailout Package

By Zoltan Simon

Oct. 29 (Bloomberg) -- Hungary, which yesterday got the largest aid package of the global financial crisis, may pay for stabilizing its markets with a deeper recession, said Laszlo Andor of the European Bank for Reconstruction and Development.

The government, which secured $25.5 billion in loans from the International Monetary Fund, the European Union and the World Bank, expects a 1 percent contraction next year, the first since 1993, as spending cuts and an emergency rate increase will stifle domestic demand and export markets falter.

``The aid package won't make Hungary immune to the real economy effects of the financial crisis,'' said Andor, an EBRD board member. ``Where the IMF appears with its strict conditions, the requirement of consolidation inevitably leads to real economy and social consequences.''

Western Europe is on the brink of a recession, exacerbating problems for neighboring emerging economies, which were scorched by investors dumping riskier assets in a flight to safety. Hungary was forced to disregard growth prospects after its currency fell to a record and stocks plunged.

``A sharp economic slowdown, driven by declining foreign- currency credit flows to the private sector, tight fiscal conditions and weak external demand is unlikely to be avoided,'' Eszter Gargyan, an economist at Citigroup Inc. in Budapest, wrote in a note to clients.

Markets Stung

Emerging economies are turning to the IMF as investors, stung by losses in developed countries caused by the global financial crisis, sell riskier developing-market stocks, bonds and currencies. Ukraine and Iceland have received IMF financing, while Pakistan and Belarus have asked for loans.

Hungary's central bank last week raised its benchmark interest rate to 11.5 percent from 8.5 percent at an emergency meeting, the biggest increase in five years. Prime Minister Ferenc Gyurcsany pledged to cut pensions and public-worker wages to narrow the budget gap more than previously planned.

The measures are thwarting an economic recovery after growth slowed to the slowest in 14 years in 2007 after Gyurcsany started cutting spending, jobs and raised taxes the previous year to narrow a record budget deficit. The government earlier expected growth to quicken to 3 percent next year.

This month, Hungarian assets were battered as foreign- currency borrowing by local companies, along with slower growth, a wider budget deficit and higher government debt than elsewhere in east Europe raised concern that the country may have difficulties in securing funding.

The forint was the world's second-worst performer against the euro in the three months through the end of last week, behind the Polish zloty. The benchmark BUX stock index, which includes OTP Bank Nyrt. and refiner Mol Nyrt., lost 45 percent in that period.

ECB Loan

Markets plummeted, with interbank lending and the local bond market frozen even after the European Central Bank agreed to a 5 billion-euro facility and the Magyar Nemzeti Bank started offering swap auctions and buying back debt to resuscitate trading.

The government was forced to cancel several bond auctions because of a lack of buyers at levels it would accept, raising concerns about its ability to finance the current account and budget deficits.

``This package should be sufficient to restore confidence in Hungary's ability to finance its 2009 budget,'' Zsolt Papp, an economist at KBC Groep NV in London, wrote in a note to clients today.

Markets were hit by the global financial crisis two years after Gyurcsany pushed through tax increases and cuts in public sector jobs and household energy price subsidies to narrow the widest budget deficit in the EU.

`Restore Confidence'

The government now aims to narrow the shortfall to 2.6 percent of gross domestic product next year from 5 percent in 2007 and an estimated 3.4 percent this year. Gyurcsany has pledged to meet all euro-adoption terms by the end of 2009.

The IMF is providing a 17-month stand-by agreement to Hungary, which will be approved by the Fund's executive board next month. A stand-by agreement is a line of credit that doesn't necessarily need to be used.

``It is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets,'' IMF Managing Director Dominique Strauss-Kahn said in a statement in Washington yesterday.

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