By Balazs Koranyi
BUDAPEST, Oct 29 (Reuters) - A larger-than-expected bailout
of Hungary by the IMF and European Union settled nerves in the
bloc's ex-communist countries on Wednesday, though the regional
fallout of the financial crisis looked to have some way to run.
The $25.1 billion rescue deal, the biggest for an emerging
market economy since the global crisis began, was the first for
an EU member and dwarfed the $2 billion and $16.5 billion sums
offered earlier to fellow strugglers Iceland and Ukraine.
The agreement will force Hungary to make painful budget cuts
that could worsen the already grim economic outlook of an
impending recession and analysts still wonder whether others in
the region may yet need propping up.
But its immediate impact on Wednesday was to boost the
forint currency and stock exchange -- welcome relief after weeks
of panic selling that had hammered the forint lower by almost 20
percent and caused the bond market to freeze up.
IMF Managing Director Dominique Strauss-Kahn said in a
statement the deal would "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," he said.
The IMF said it had agreed to offer Hungary a $15.7 billion
(12.5 billion euros) loan programme, while the EU stood ready
with an additional $8.1 billion in financing and the World Bank
another $1.3 billion.
The full amount was about twice what analysts said Hungary
had needed and comes on top of a 5 billion euro facility agreed
with the European Central Bank earlier this month.
"In short, this is close to the overkill scenario,"
UniCredit economist Martin Blum said.
"More broadly, we consider today's news positive for all EU
new member states to the extent the EU is providing meaningful
support too."
Hungary's forint jumped more than 2.5 percent versus the
euro in early trade and the Polish zloty and Czech crown also
gained. Shares on the Budapest bourse <>jumped 9.8 percent,
led by OTP Bank <OTPB.BU> and oil group MOL <MOLB.BU>.
RECESSION LOOMS
The financial crisis has come as a shock to most countries
in central and eastern Europe, a region of states ranging from
those still struggling with fundamental economic problems to
those fully integrated in the European Union and euro zone.
The IMF said on Tuesday it was not in talks with Romania --
whose debt Standard & Poor's cut to "junk" status a day earlier
-- but said its external environment, or its ability to borrow
cash to fuel the economy, was "very difficult".
Countries across the region have slashed growth forecasts
and analysts have expressed worries over economies in the
Baltics and Balkans, which were headed for at best bumpy
landings even before the latest round of financial turmoil.
Investors had feared Hungary's heavy dependence on borrowing
from abroad -- 90 percent of mortgages this year were in Swiss
franc loans -- meant the country could struggle to continue to
find financing from foreign sources to fuel its economy.
To encourage investors to keep cash in the country, the
central bank raised interest rates last week by 3 percentage
points to 11.5 percent, but even that measure failed to
kick-start the bond market and support the currency.
Market watchers said the new funding deal had removed much
of the doubt over Hungary's ability to find funds.
"This package should be sufficient to restore confidence in
Hungary's ability to finance its 2009 budget," KBC economist
Zsolt Papp said in note.
It was also a boost after the government said on Tuesday the
economy could contract by up to 1 percent next year -- the first
recession since the fall of communism -- although the effects of
budget cuts to accompany the deal were still not clear.
As part of the deal with he IMF, Hungary agreed to lower its
2009 spending through cutting once taboo welfare benefits and
will reduce the deficit to 2.6 percent of GDP from an earlier
plan for 2.9 percent.
Bond dealers said the IMF package could allow the central
bank to cautiously claw back some of last week's emergency rate
hike but the first move should only come once markets calm.
(Reporting by Balazs Koranyi)
