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Hungary, IMF agree on package to shore up economy

WASHINGTON- Hungary has reached agreement with the International Monetary Fund and European Union on a broad economic rescue package, including substantial financing, to stabilize its economy rocked by the global financial crisis, the IMF said on Sunday.

"A substantial financing package in support of these strong policies will be announced when the program is finalized in the next few days," IMF Managing Director Dominique Strauss-Kahn said in a statement that did not indicate the size of the package.

"Participants will include the IMF, the EU, and some individual European governments, together with regional and other multilateral institutions," he added.

He said the package would help to bolster the Hungarian economy's near-term stability and improve its long-term growth potential.

"The authorities' program will ensure fiscal sustainability and strengthen the financial sector," he added.

Hungary had lined up potential financial help from the IMF and the European Central Bank earlier this month after foreign investors dumped Hungarian assets, its currency plunged and the government bond market froze up on worries over the country's large external financing need.

Hungary, which is a member of the European Union, has been in talks with the Washington-based global lender since early October to try and restore confidence in falling markets.

Hungary's government and the central bank have taken a series of measures to shore up the currency and financial markets, and the central bank hiked interest rates by as much as 300 basis points on Wednesday to 11.5 percent in an emergency move.

Emergency measures

The country's problem is that it relies heavily on foreign investors buying its bonds while its banks may face difficulty in securing foreign currency financing as liquidity dries up in international and local money markets.

The crisis has caused credit markets to malfunction so severely that many emerging market economies cannot quickly access the capital they need. It has been most acute in dollar funding markets as Western banks hoard money and refuse to lend to each other.

A source close to the Hungarian government told Reuters the program was "of convincing size and force."

"In the past one or two days, in talks at the highest level, all significant hurdles have been removed, and the parties expect that they can sign a final agreement and make it public this coming week," the source told Reuters.

"The agreement contains standby access to resources, which will significantly reduce Hungary's exposure to foreign market financing," the source added.

With Hungary's commitment to strengthened economic policies, Strauss-Kahn said he expected Hungarian banks and other financial institutions would be able to start lending.

"The policies Hungary envisages justify an exceptional level of access to fund resources," Strauss-Kahn added.

Earlier on Sunday, the IMF said it had agreed in principle to a $16.5 billion standby loan deal with Ukraine and on Friday it agreed to a $2.1 billion deal with Iceland.

"Potentially this (package) could be on the large side, considering the Ukraine deal. It would probably boost sentiment in the short term," Istvan Zsoldos, an analyst at Goldman Sachs in London said. "The IMF package would be an important tool to combat this self-fulfilling spiral," Zsoldos added.