IMF “stands ready” to assist Hungary financially

Sources:

N.Y. Times: IMF says it’s ready to assist Hungary

Financial Times: IMF offers Hungary help as Poles rethink euro

IMF Press Release

As Iceland weighs an appeal to the IMF for funding to avoid national bankruptcy, the IMF today announced that it is ready and willing to help Hungary’s economy survive the crisis with both technical and financial assistance.  The Hungarian government welcomed this announcement as reassurance for the markets, which have suffered from lack of investor confidence even though Hungarian banks did not invest in toxic U.S. securities. Hungarian officials said they did not expect to need the assistance, though interbank lending costs continue to skyrocket. 

The interest rates at which banks lend to each other reflect bank confidence because a bank that feels safe will be more likely to lend more freely, and at a lower rate, than a bank that fears an impending cash emergency.  In a credit crisis, interbank interest rates increase because even banks with excess cash reserves are hesitant to lend as the likelihood of a run on the bank increases.

Hungary’s interbank confidence problems demonstrate the financial crisis’ far-reaching effect into emerging markets once thought insulated from the reverberations of the crisis.  Hungary has been following a very conservative financial plan in an effort to reduce their national debt, the highest among the eastern members of the European Union, in order to qualify for eurozone inclusion by 2012.  These policies have reduced economic growth which has made them more vulnerable to the crisis.  Officials now say they are reconsidering that target date in light of the strain from the global financial crisis.

Discussion: 

Should IMF lending be a solution for restoring investor confidence in nations with vulnerable economies?  Will more advanced economies start turning to the IMF for assistance as the crisis continues?  Should the eastern European member states of the EU continue to follow the restrictive policies necessary for inclusion in the eurozone even as they face stress from the financial crisis?