IMF Survey: IMF Agrees $15.7 Billion Loan to Bolster Hungary's Finances

IMF News, November 6, 2008

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IMF Executive Board approved a $15.7 billion loan for Hungary to ease financial market stress and support longer-run reforms of government finances and the banking sector.
The Stand-By Arrangement duration: 17-month Stand-By Arrangement for Hungary.
The arrangement was approved under the Fund's fast-track Emergency Financing Mechanism and entails exceptional access amounting to 1,015 percent of Hungary's IMF quota.
Immediate availability: $6.3 billion immediately available; remainder disbursed in five installments subject to quarterly reviews.

Implement a substantial fiscal adjustment so the government's debt-financing needs will decline.
Maintain adequate liquidity and strong levels of capital in the banking system to restore stability in the financial sector and create conditions for economic recovery.

Program envisages a large structural fiscal adjustment of 2½ percent of GDP with emphasis on expenditure measures.
Measures include reductions in the overall government wage and pension bill: nominal wage adjustments postponed and pension bonuses suspended.
Low-income pensioners excluded from benefit reductions.
Introduction of a rules-based fiscal framework to put fiscal sustainability on a permanent footing.
Rationale: reduce the large size of the public sector to ease short-term financing pressures and improve medium-term debt sustainability.

Preemptive recapitalization of eligible banks to ensure high capital levels.
Strengthening of the supervisory and crisis management abilities of the Hungarian Supervisory agency.
Banking sector support package includes provisions for added capital and resources to finance a guarantee fund for interbank lending.
Objective: ensure banks are sufficiently strong to weather the imminent economic downturn and reduce the risk of losses from balance-sheet mismatches.

Hungary population: a country of around 10 million people.
Hungary joined the European Union in 2004.
High external debt levels: 97 percent of GDP at end-2007.
Balance-sheet mismatches and high external debt reduced investor appetite as global liquidity declined and risk aversion rose.
Despite policy strengthening since 2006, Hungary was hit hard by global deleveraging and rising perceptions of counterparty risk.

Growth: projected to contract to -1 percent in 2009 from around 1¾ percent in 2008.
Recovery: growth not expected to resume until 2010 and converge towards its estimated potential of 3 percent until after 2011.
Inflation: peaked at 9 percent in early 2007; projected to reach 4 percent at end-2009.
Transmission channels: weak private consumption and investment due to sharp reduction in new bank lending and exchange rate depreciation.
External environment: slow recovery expected because slowdown is occurring in Hungary's main trading partners and global deleveraging will leave less foreign capital available.

Fiscal: substantial structural adjustment of 2½ percent of GDP, expenditure-focused, rules-based fiscal framework.
Banking: upfront bank capital enhancement, preemptive recapitalization, strengthened supervision and crisis management, interbank guarantee fund financing.
External: large external financing assistance to minimize the risk of a run on Hungary's debt and currency markets given the large stock of external debt.

Source: IMF Survey online, November 6, 2008 — "IMF Agrees $15.7 Billion Loan to Bolster Hungary's Finances".