Hungary Secures 12.5 Billion Euro IMF Rescue Package

By Zoltan Simon and Lily Nonomiya

Oct. 29 (Bloomberg) -- Hungary will receive a 12.5 billion euro ($15.7 billion) loan from the International Monetary Fund to help spur an economy roiled by the global financial crisis.

``The Hungarian authorities have developed a comprehensive policy package that will bolster the economy,`` Dominique Strauss-Kahn, managing director for the Washington-based IMF, said in a statement. ``At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets.''

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

The European Union is ready to provide 6.5 billion euro in funds and the World Bank has agreed to provide 1 billion euros, the IMF said. The loan is a 17-month stand-by agreement, which will be approved by the Fund's executive board next month, the statement said. A stand-by agreement is a line of credit that doesn't necessarily need to be used.

Hungarian assets have been ravaged as foreign-currency borrowing by local companies and consumers, 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.

Record Low

The central bank was forced to raise the benchmark interest rate to 11.5 percent from 8.5 percent, the biggest increase in five years, after the forint plunged more than 20 percent against the euro in three months. The currency fell to a record low against the euro on Oct. 23.

The benchmark BUX index plummeted to more than a four-year low, while OTP Bank Nyrt., the nation`s largest lender, lost 53 percent of its value this month.

The government secured an emergency loan facility of 5 billion euros ($6.2 billion) from the European Central Bank and the central bank started offering foreign-exchange swaps and buying back bonds to help resuscitate interbank lending and debt trading.

Hungary's markets were hit by the global financial crisis two years after Prime Minister Ferenc Gyurcsany pushed through tax increases, public sector job cuts, and household energy price subsidy cuts to narrow the widest budget deficit in the European Union.

The government managed to trim the shortfall to 5 percent of gross domestic product last year from 9.2 percent in 2006. It plans to narrow the gap to 2.9 percent next year, within the European Union's rule, from an estimated 3.4 percent this year.

Postpone Tax Cuts

Gyurcsany has also postponed tax cuts for next year, aimed at boosting economic growth from a 14-year low of 1.1 percent last year, to ease the country's financing pressure.

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, which first drew up next year's budget expecting 3 percent growth, may now face contraction.

The government and the central bank have pledged to meet euro-adoption requirements for the deficit, inflation and national debt by next year. The country doesn't have a target date for the switchover, because deficit overruns forced it to scrap previous goals.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net