Sunday, November 02, 2008

IMF, World Bank, and EU agree to lend $25bn to Hungary

Sources: IMF Survey: IMF, EU, and World Bank Line Up $25 Billion for Hungary

New York Times: Hungarian Stocks Ride News of IMF Aid Hungarian Stocks Decline Despite IMF Aid Pledge


The EU, IMF and World Bank agreed Tuesday to a loan arrangement in which Hungary could draw on $15.7 bn from the IMF, $8.1bn from the EU (Hungary became a member state in 2004), and $1.3 bn from the World Bank.  This agreement, as with the IMF loans to the Ukraine and Iceland, was made contingent on Hungary agreeing to develop new policy plans for improving its economic situation and restoring investor confidence.  Hungary will also be forced to reduce the federal budget in order to create a more sustainable national debt outlook for the future, a major concern in IMF lending plans. 

Hungary’s economy has suffered from the credit crunch because a large portion of its public debt is in foreign currency, which makes it vulnerable to a drop in its own currency’s value.  The forint (Hungary’s currency) dropped more than 20 percent in October, raising serious concerns about the nation’s ability to meet its payment obligations. 

The restrictive economic policies Hungary has followed in order to prepare for eurozone eligibility have hindered economic growth in recent years.  Since the crisis hit Europe, foreign investment has been increasingly scared off by this lack of growth and Hungary’s relatively high public debt load.

The morning after the announcement the Budapest Stock Exchange rose 11 percent and the forint was up more than 7 percent against the U.S. dollar for the week.

Discussion:  Are other EU member states likely to need IMF assistance?  What are the long-term consequences of government budget cuts and restrictive economic policies?  What does this agreement do to Hungary’s eurozone hopes?

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