Hungary bailout deal agreed - what next for CEE?

The IMF, EU and World Bank agreed to a $25.1 (zł.67.4) billion economic rescue package for Hungary last week, as the country's troubles threatened to destabilize the region. The Hungarian government had previously warned that the economy could fall into recession next year.

The IMF said that it had agreed to loan Hungary around $15.7 (zł.42.2) billion, while the EU invoked a little-known clause in its treaties to offer an additional $8.1 (zł.21.8) billion of support and the World Bank put up another $1.3 (zł.3.5) billion. The IMF loan will be distributed over 17 months.

This is the largest rescue package put together since the global financial crisis began and the first for an EU member state. The plan dwarfs the IMF bailout deals agreed to two weeks ago for Iceland ($2.1 billion, zł.5.6 billion) and Ukraine ($16.5 billion, zł.44.3 billion).

"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," IMF managing director Dominique Strauss-Kahn said in a statement.

"At the same time, it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets," he added.

The IMF's financing amounts to more than 10 times Hungary's IMF quota. Each IMF member is assigned a quota based on its size in the world economy. Hungary's economy has taken a severe beating by the crisis, since its banks are heavily exposed to foreign financing at a time when investors are retreating from developing economies.

Emerging markets rally

News of the Hungary bailout package, along with the US Federal Reserve's decision to cut interest rates by 50 basis points, helped some regional stock markets and currencies, which had dropped  significantly in recent days due to risk aversion.

On Thursday, the złoty rose 2.25 percent to zł.3.478 against the euro, while the Hungarian forint was up more than one percent to HUF253.02 per euro. Regional stock markets also rallied throughout the week.

"We've seen a significant reversal of risk aversion and those currencies which were sold against the dollar aggressively in the last month have seen a bit of a reversal," said James Shugg, an economist at Westpac.

More countries at risk?

The EU's involvement in the package marked the first time it has invoked an article which allows it to provide aid to countries outside the euro zone if "a member state is in difficulties or is seriously threatened with difficulties as regards its balance of payments, either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal."

Thus, the way has been paved for further rescues of member states in the region. No other EU members had approached the European Commission or IMF for aid as WBJ went to press, but market speculation had it that the Baltic states, as well as Romania or Bulgaria, could be next.

Capital Economics' EMEA economist Neil Shearing told Reuters that hopes of the Hungary deal signalling an end to turmoil in the region would be "somewhat misplaced."

"There's a number of other countries that are on the brink: the Balkans, the Baltics, Turkey as well. I think it's a matter of time before the IMF [is] called in there," he said.

Commerzbank analyst Barbara Nestor said Romania, whose debt was cut to junk status by credit rating agency Standard & Poor's last Monday, was one country that might approach institutions for aid.

Region on the brink?

But Shearing said that as investors left emerging markets, the lack of funding would impact the entire region, sending all countries except Russia, Poland, the Czech Republic and Slovakia into recession.

"This is a very serious funding crisis ... The whole region is teetering on the brink," he said. "As liquidity begins to dry up ... these countries are going to suffer." (Reuters)