IMF, EU and World Bank feed cash-starved Hungary

The International Monetary Fund, the European Union (EU), and the World Bank will provide a $25.1 billion financing package for Hungary to support its ailing economy.

The IMF’s offering will involve lending $15.7 billion over 17 months in a stand-by arrangement, while the EU will loan $8.1 billion, and the World Bank will provide the remaining $1.3 billion.

This is the third rescue package instigated by the IMF for a sovereign since the start of the financial crisis. The financial support for Hungary follows commitments made last week to help Iceland and Ukraine, of $2.1 billion and $16.5 billion respectively. The fund is also in talks to grant financial assistance to Pakistan.

"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. At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets,” said Dominique Strauss-Kahn, managing director of the IMF.

The package includes steps to maintain adequate domestic and foreign currency liquidity, as well as strong levels of capital, for the banking system.

Hungary’s currency and stock markets have plunged this month. Investors have withdrawn money from the country as a result of growing fears over the financial strength of the country, and in particular its banks.

Hungary’s forint depreciated to 218.54 against the dollar on October 23 from 172.02 at the start of the month. It had rebounded slightly since to 210.35 on October 28. Meanwhile, the Budapest stock exchange crashed to 10,751.23 on October 27 from 18,868.9 at the start of the month. It stood at 11,744.75 on October 28.

Rating agency Standard & Poor’s placed the country’s BBB+ sovereign credit rating on review for downgrade on October 15.

"This action reflects our concerns over mounting financial-sector funding pressures and their potential to raise general government debt materially from its current level of 67% of GDP," explained Standard & Poor's Frankfurt-based credit analyst Kai Stukenbrock. "Domestic and foreign-owned banks are facing sharply higher financing costs and reduced access to international markets."

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