Ukraine Gets $16.5 Billion Loan From IMF; Hungary Next in Line

By Daryna Krasnolutska and John Martens

Oct. 27 (Bloomberg) -- The International Monetary Fund will lend Ukraine $16.5 billion and give Hungary ``a substantial financing package'' as the turmoil in global credit markets and recession concerns sweep across eastern Europe's emerging markets.

The 24-month Ukrainian loan is conditional on parliamentary approval of legislation to support the country's banks, the Washington-based lender said yesterday in a statement. The Hungarian deal was reached in cooperation with European Union.

Eastern Europe is being buffeted as investors, stung by losses in developed nations, sell riskier emerging-market stocks, bonds and currencies. Ukraine is the first nation in the region to receive IMF help in the crisis. Details of Hungary's agreement will be announced in coming days. Belarus last week asked the IMF for at least $2 billion after its banks lost access to financing.

``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.''

Ukraine will need to balance its budget by reining in social spending and narrow the current-account deficit, the Kiev-based central bank said in a statement.

Banks

President Viktor Yushchenko faces an economic meltdown as prices for Ukraine's main exports, including steel, drop and a weakening currency makes goods purchased abroad more costly. He has urged the cabinet to raise custom duties to curb imports and help domestic producers boost exports to counter the widening trade gap.

Ukraine agreed to set up a fund that will buy stakes in the nation's banks and pass legislation that forces lenders to halt dividend payments to retain capital, central bank official Serhiy Kruhlik said in a telephone interview in Kiev today.

The central bank took control of closely held Prominvestbank on Oct. 7 and promised an injection of 5 billion hryvnia ($830 million) to bail out Ukraine's sixth-biggest bank by assets after a run by depositors.

The government also plans to raise the state guarantee on bank deposits to 100,000 hryvnia from 50,000 now and will use proceeds from privatizations and bond sales for the bank bailout fund, according to Kruhlik. The parliament is scheduled to vote on the amended legislation on Oct. 28.

`Domino Effect'

``This has to be seen in the light of the risk of a larger- scale domino effect in the region,'' said Lars Christensen, senior analyst with Danske Bank A/S. ``It will need serious economic reform, a significant restoration package to justify this amount. With political uncertainty as in Ukraine, the country will have to go under the IMF's economic dictatorship.''

Ukraine's current-account deficit may widen to $15 billion this year, central bank governor Volodymyr Stelmakh said this month. The gap was $7.5 billion, or about 6 percent of gross domestic product, in the first eight months.

The former Soviet republic's currency tumbled 13 percent last week and touched a record 6.0812 per dollar on Oct. 24. the lowest since the hryvnia was introduced in 1996. Annual inflation accelerated to a record 31.1 percent in May before slipping to 24.6 percent in September.

Ukraine is the least creditworthy of Europe's transition economies measured by the cost of credit-default swaps, conceived to protect bondholders against default. Its economic predicament is complicated by a political crisis that led to collapse of the government and calling of early elections.

Yushchenko dissolved the parliament on Oct. 8 and a new one will be chosen on Dec. 14, the second national elections in as many years. His party, which seeks closer ties with the European Union and the North Atlantic Treaty Organization, quit the coalition on Sept. 3 after former ally, Prime Minister Yulia Timoshenko, joined with the pro-Russian opposition to strip the president of some powers.

Hungarian Woes

Hungarian 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 International Monetary Fund pledged support in principle.

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, signaling that its currency's defense was the biggest priority even at the expense of economic growth.

The IMF on Oct. 24 agreed to lend Iceland $2 billion. Pakistan may also need an emergency loan to help repay debt.

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