* EU and IMF join forces in $25.1 bln bailout
* Analysts say deal shows concern for Central Europe region
* Forint gains 2.5 pct, Budapest stocks up 11.4 pct
* Austrian banks pledge to keep lending, investing.
(Adds analysts)
By Balazs Koranyi
BUDAPEST, Oct 29 (Reuters) - A $25.1 billion 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 larger-than-expected rescue, 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 funds involved were twice as much as markets had
anticipated and analysts said the IMF may have wanted to make a
bigger than needed move to signal it would protect the rest of
the region from a dive in confidence.
"This clearly illustrates that the financial crisis is
significantly greater in Central and Eastern Europe than most
market participants have been willing to accept until now,"
Danske Bank Chief Analyst Lars Christensen said.
"The fact the EU is so directly involved indicates that the
EU (and the ECB) is afraid that if Hungary were allowed to
implode, then the crisis could rapidly spread to the other CEE
countries," Christensen said.
The deal will force Hungary to make painful budget cuts that
may worsen the outlook for an economy heading for recession.
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.
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 11.4 percent,
led by OTP Bank <OTPB.BU> and oil group MOL <MOLB.BU>.
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.
CLOSER TO EURO ADOPTION?
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.
The crisis will put back Hungary's drive to catch up with
Western Europe but analysts said the IMF help may actually push
the country -- long regarded as the region's sick man -- closer
to membership of the euro zone in the longer run.
"This will stigmatize Hungary for quite a while," Citigroup
economist Eszter Gargyan said. "But Hungary has become detached
from its (central European) peers quite a while ago and it's not
IMF help that has sullied our reputation."
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.
Austria's Raiffeisen International <RIBH.VI>, Erste Group
Bank <ERST.VI> and UniCredit's <CRDI.MI> Bank Austria on
Wednesday pledged their local units would continue lending in
forints and, "where appropriate", in euros to Hungarian clients.
"The negative sentiment temporarily noticeable in Central
and Eastern Europe and also in Hungary does not reflect the
enormous potential of the region," said Erich Hampel, Bank
Austria's chief executive and a UniCredit board member.
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.
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; Editing by Patrick Graham)
