"The Ecofin (EU finance ministers) welcomes the readiness of the IMF to consider providing technical and financial assistance as needed to Hungary," the executive European Commission and the EU's French presidency said in a joint statement.
The statement said they was following the situation on Hungary's financial markets closely following severe pressure on the forint and Hungarian bonds on Friday. Hungary's main stock index plunged 24 percent last week, the forint weakened 4.8 percent and the yield on the benchmark five-year bond soared to its highest level in almost nine years. The forint rose to 252.41, from 257.8 late on Friday at 10:04 a.m. in Budapest. while the BUX index was up 6.94 percent following the announcement.
Hungary has been hit hard by the global financial crisis because it has one of the most fragile economies in Europe due to its high budget and current account deficits and heavy reliance on external financing. The EU authorities said they were in contact with Hungary to ensure that any conditions attached to possible IMF aid were consistent with economic goal agreed with the EU.
The International Monetary Fund have issued a statement, which says it is “in close dialogue" with the local authorities and the European Union to discuss further responses to the current challenges, including possible technical and financial support by the IMF. The statement by IMF Managing Director Dominique Strauss-Kahn on Hungary is as follows:
“Against the background of global financial turbulence, Hungary's government securities market and some other key markets have experienced stress over recent days."
“These pressures emerged despite the country's improved macroeconomic and financial policies of the past years, which include a strengthening of its fiscal position, a narrowing of the current account deficit, and a cautious implementation of monetary and exchange rate policies."
“The authorities have responded to the recent turmoil in global markets through a continuation of their macroeconomic convergence program, coupled with enhanced monitoring of financial sector developments and increased deposit guarantees, which were augmented in line with an EU-wide move."
“To complement these efforts, we are in close dialogue with the Hungarian authorities and the EU to discuss further responses to the current challenges, including possible technical and financial support by the IMF."
“I have informed the authorities that the IMF stands ready to assist their efforts. We will provide technical assistance as needed and, in the context of a supportive policy setting, are ready to undertake discussions on possible financial assistance, responding rapidly."
I will try and find the time to update during the day, as more information becomes available.
Market reaction to the IMF announcement has been pretty swift, but this was to be expected. By late morning the benchmark BUX stock index was up as much as 10 percent, the forint extended a gain against the euro to 3.6 percent and the benchmark government bond rose the most in almost five years. OTP Bank, Hungary's largest lender, surged as much as 23 percent.
The cost of protecting Hungary's government bonds against default dropped 32 basis points to 338, the biggest decline in three weeks, after more than doubling to a record this month.
This is all good news, but nothing to get euphoric about. The IMF has not put up any money yet, and has simply limeted itself to saying it will do if needed. But this guaranteed will be honoured, and it will need to be.
So then we will need to see just what kind of package is involved, and what the attached "strings" are going to be, before we can assess the macroeconomic consequences. At the real economy level, nothing changes for the time being, and the situation continues to be "preoccupying".
Hungary's MKB Bank has also announced that it is going to stop lending in euro- and Swiss franc-based loans for an unspecified period. The decision has no impact on already approved loan applications. MKB said the forint's huge volatility in the past weeks, especially its marked depreciation at the end of last week, make the outlook on the currency more uncertain than it has ever been.
In the same vein, Gyula Tóth, analyst at UniCredit (ouch!) in Vienna is widely quoted to the effect that the proposal is "a good idea in our view, though clearly short on details at this stage and certainly not something which will reduce HUF volatility in the m-t to the extent that the IMF is unlikely to support anything but a HUF freefloat."
Portfolio Hungary makes the point that MKB is not the only local bank that is cuuting its risks risks by reducing the availability of FX loans, which have sharply decreased or even disappeared at other credit institutions, as well.
In an interview with Portfolio.hu, Csaba Lantos (former head of OTP Bank's retail business) said the ratio of foreign currency-based lending is likely to fall to below 50% within total loans. Sine new retail mortgage loans in Hungary have been almost exclusively foreign currency in recent months, PH point out that:
"Should the suspension of FX-based lending become a permanent phenomenon and other banks follow suit, it could greatly discourage people from taking out loans, as the current HUF interest rate levels are not exactly attractive".
Exactly, and this is precisely why the whole macro cocktail Hungary is drinking at the present time is so devilishly complicated.
Hungary's government today (Tuesday) urged European Union leaders to allow the European Central Bank to intervene in the markets of the 27-nation bloc that don't use the euro to protect the economies of eastern Europe. Hungary's prime minister Ferenc Gyurcsány said he will plans to argue that the EU should help build a safety net for the bloc's poorest members.
``The European Central Bank, regardless of whether a country is a member of the euro zone, should use the same intervention facilities to serve the interest of EU national economies,'' Gyurcsany said at a press conference in Budapest today after meeting with Hungarian business leaders.
Gyurcsany also indicated that he plans to propose at the forthcoming EU summit that the requirement for member states to cut budget deficits to below 3% of GDP be relaxed during the current crisis.