Rescuing Hungary
October 29, 2008
The European Union came to Hungary's rescue by extending a loan of 6.5 billion euros ($8.25 billion) to the embattled country, French Finance Minister Christine Lagarde said in a statement.
Hungary, whose currency, the forint, as well as stocks and bonds have plunged under pressure of the on-going financial crisis, will be given a 20-billion-euro lifeline to help balance a large current account and budget deficit, prop up a partially overvalued currency, support a low stock of foreign reserve and secure a high level of short-term foreign currency debt.
Officials from the EU's executive, the European Commission, confirmed the announcement in a statement released in Brussels.
"Against the background of heightened financial market stress in Hungary, the (EU) is ready to participate in a coordinated financing package with the International Monetary Fund (IMF) to underpin balance-of-payments sustainability in Hungary," the statement said.
The EU's pledge of aid "will be provided in the context of a strong commitment by the Hungarian authorities to implement a flanking policy program" aimed at stabilizing the economy, the commission statement added.
The 27-member bloc "stands ready to provide a loan of 6.5 billion euros to Hungary under the EU medium-term assistance facility," which is aimed at helping member states which are struggling to keep control of their balance of payments, the statement said.
IMF, World Bank chip in
As well as the EU loan extension, the IMF pledged a loan of 12.5 billion euros while the World Bank added another billion euros.
"An IMF staff mission and the Hungary authorities have today reached agreement... on an economic program supported by a 12.5-billion-euro loan under a 17-month stand-by arrangement," IMF chief Dominique Strauss-Kahn said.
The IMF loan is subject to approval from the IMF executive board, which the Washington-based institution said could happen in early November.
On Oct. 22, the Hungarian central bank was forced to jack up interest rates by 3 full points to 11.5 per cent in an emergency bid to defend the forint.
"The Hungarian authorities have developed a comprehensive policy package that will bolster the economy's near-term stability and improve its long-term growth potential," Stauss-Kahn added. "At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets."
Hungary joins growing list of those in need
The IMF, a lender of last resort to cash-strapped nations, has offered assistance to a number of countries suffering from the fallout from the financial crisis in recent weeks.
Iceland and Ukraine have also agreed loans while Belarus and Pakistan have appealed for assistance.
In exchange for IMF money, countries are required to implement a series of economic reforms.
Measures undertaken by Budapest will include commitments to maintain adequate domestic and foreign currency liquidity, as well as strong levels of capital for the banking system.
The Hungarian government has also agreed to "measures in the fiscal area (that) will reduce government-financing needs and ensure longer-term debt sustainability," the IMF chief added.