Ukraine Gets $16.5 Billion IMF Loan; Hungary Is Next

By Daryna Krasnolutska and John Martens

Oct. 27 (Bloomberg) -- The International Monetary Fund agreed to loans for Ukraine and Hungary to keep the turmoil in global credit markets and recession concerns from decimating Europe's emerging markets.

The IMF agreed to lend $16.5 billion to Ukraine for 24 months and will announce a ``substantial financing package'' for Hungary in the ``next few days,''' the Washington-based lender said yesterday in a statement. Iceland already received a loan, while Belarus and Pakistan are also seeking help.

The IMF is helping shore up economies in eastern Europe as investors, stung by losses in developed nations, sell riskier emerging-market stocks, bonds and currencies. The lender moved to prop up the region's most afflicted countries to help avoid the effects spreading.

``For emerging Europe, clearly this is good news to the extent that it reduces risk in one of the region's more vulnerable countries, reducing contagion risk,'' Martin Blum, an economist at UniCredit SpA in Vienna, wrote in a note today. ``Look for the IMF to continue at a fast pace to ensure countries with underlying vulnerabilities are supported.''

Stocks Plunge

The MSCI Emerging Market Index lost 42 percent of its value this month. The gauge today fell as much as 5 percent, extending its loss to a fifth day. Over the past three months, the three worst-performing currencies against the euro are the Polish Zloty, the Icelandic krona and the Hungarian forint.

Hungary's currency, which fell to a record against the euro on Oct. 23, rose as much as 1.6 percent today and traded at 272.81 at 1:35 p.m., near a week high. The country's IMF agreement, which will be ``convincing in size and strength,'' is within reach, Prime Minister Ferenc Gyurcsany said today.

``We have agreed on a policy package, which is very good,'' Christoph Rosenberg, the IMF's senior representative to eastern Europe and the Baltic countries, said in a phone interview. ``Putting together a financing package will require a few more days.''

The loan for Ukraine, the first nation in the region to receive IMF help in the crisis, is pending parliamentary approval of legislation to support the country's banks. The government must do more to reverse the flight of capital, economists said.

`Half the Issue'

``The money is only half of the issue, conditionality is key,'' said Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London. ``We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.''

Ukrainian President Viktor Yushchenko faces an economic meltdown as prices for Ukraine's main exports, including steel, drop and a weakening currency makes imports more costly. The country will hold the second national elections in so many years in December after Yushchenko dissolved parliament following a clash with Prime Minister Yulia Timoshenko, a former ally.

The country will set up a fund to buy stakes in banks and pass legislation that forces lenders to halt dividend payments to retain capital, central bank official Serhiy Kruhlik said in a phone interview. The central bank took control of closely held Prominvestbank, Ukraine's sixth-biggest bank, on Oct. 7 after a run by depositors.

`Prevent Devaluation'

The current-account deficit may widen to $15 billion this year, the central bank governor Volodymyr Stelmakh said this month. The hryvnia tumbled 13 percent last week and touched a record 6.0812 per dollar on Oct. 24. Annual inflation accelerated to a record 31.1 percent in May before slipping to 24.6 percent in September.

``The loan will strengthen the position of the central bank and help prevent sharp devaluation,'' Olena Bilan, an economist at Dragon Capital in Kiev, said in a phone interview. ``The hryvnia isn't likely to decline as it did recently.''

Hungary turned to the IMF as stocks, bonds and the forint plunged in the past two weeks on concern the country will face difficulties financing its current account and budget deficits with global credit drying up. Markets continued to slide even after the European Central Bank and the IMF pledged support.

The central bank on Oct. 22 raised the benchmark interest rate by 3 percentage points, the biggest increase in five years, to 11.5 percent to defend the forint.

Sandor Csanyi, head of the country's largest lender OTP Bank Nyrt., urged the government to peg the forint to the euro next year to stabilize it. Euro adoption at a ``good time'' can be an ``anchor'' to financial stability and the government will work to reach terms ``as soon as possible,'' Gyurcsany said.

To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; John Martens in Brussels at jmartens1@bloomberg.net