IMF ready to bail out swooning Hungary
LEIGH PHILLIPS
13.10.2008 @ 17:58 CET
Hungary may be the first member of the European Union to be bailed out by the International Monetary Fund (IMF) since Britain was forced to take out a €3 billion loan in 1976.
Hungary's forint slid sharply last week to its lowest level against the euro in two years, while the Budapest Stock Exchange saw heavy losses and investors were taking money out of the country.
Hungary may be the first EU member state to take IMF loans since the UK in the 1970s (Photo: EUobserver.com)
The forint did however regain some ground on Monday, largely in reaction to the financial rescue plan announced by G7 finance ministers over the weekend, analysts believe.
In an attempt to staunch the bleeding, last Friday, Budapest announced sharp spending cuts to government programmes, a bank deposit guarantee similar to that announced by other member states and delays to planned tax cuts.
"There is a significant and strong attack against the Hungarian money and capital markets,'' prime minister Ference Gyurcsany declared in announcing the emergency cut-backs.
"[Hungary] must not spend in these times," he said.
On Monday, in response to the spreading financial contagion, Dominique Strauss-Kahn, the head of the IMF - an international institution set up to maintain order in the international monetary system - said that the financial institution was ready to "rapidly" step in with loans to the beleaguered east European nation.
"We are in close dialogue with the Hungarian authorities and the EU to discuss further responses to the current challenges, including possible technical and financial support by the IMF," he said in a statement.
"I have informed the authorities that the IMF stands ready to assist their efforts," he added.
"We will provide technical assistance as needed and, in the context of a supportive policy setting, are ready to undertake discussions on possible financial assistance, responding rapidly."
'All tools available'
The EU said it welcomed Mr Strauss-Kahn's offer, adding that it was ready to back up IMF aid with its own support using "all tools available", although representatives of the bloc did not mention any financial assistance.
"The Council and the Commission are monitoring the situation closely, and support Hungary' efforts in tackling current challenges," said the presidency of the council of EU economic and finance ministers [ECOFIN] in a statement on Monday.
"The ECOFIN welcomes the readiness of the IMF to consider providing technical and financial assistance as needed to Hungary," the statement continued.
The council of ministers said that it is in close consultations with the Hungarian authorities and the IMF and will ensure that any conditions attached to IMF funds are consistent "with EU policy advice".
IMF bail-outs of countries have always come attendant with strict demands for sweeping austerity measures including reductions in social programmes and privatisation of public assets.
In 1976, to deal with soaring inflation, the UK requested a €3 billion (£2.3bn) loan from the IMF. In return, the then Labour government was required to deliver deep cuts to public spending.
Baltics, Ukraine
Hungary however is just the tip of the iceberg, warn experts. UK economist Barry Gills of Newcastle University told the EUobserver that the crisis is set to hit much of eastern Europe more profoundly than it has "Old Europe."
"There is a looming problem in the east - Ukraine and the Baltics in particular - where the IMF might have to be called in with very large support loans," he said.
"In eastern Europe, growth is weakening and in some places going into reverse. They are experiencing some of the classic problems of developing countries in the past - structural imbalances such as insufficient reserves from exports to cover import bills; accruing debt to cover debts and balance of payments."
"This can lead to vulnerability of the currency, so they have to use reserves to protect the currency."
Mr Gills worried that the European Union may not have the funds at its disposal to come to the aid of its newest members.
"Does the EU have the financial reserves apart from the IMF to solve some of these regional solutions? I'm not so sure that's clear at the moment."
He also fretted about the significance of the IMF coming to the aid of member states. "Does the EU want countries under IMF tutelage within its borders?"