IMF Relief for Hungary Only First Possible Rescue for European Victims of Crisis     Print Email
Thursday, 30 October 2008

Hungary has received a 20 billion Euro ($25.5 billion) rescue package by the International Monetary Fund, the EU, and the World Bank to help restructure their economy and fight off the possible collapse of the forint.

This unusual coordinated action – which is a first for the EU – signifies fears that go well beyond Hungary as analysts see the financial crisis spreading to other nations in Central Europe, the Baltics and the Balkans.

Hungary is only one of the emerging economies on periphery of the eurozone that are suffering severe economic crises because they do not belong to the eurozone. The pattern in these countries is one of financial exposure because financial actors have borrowed heavily in foreign currencies in order to take advantage of better interest rates (for example, in the Swiss franc). Now that tactic is backfiring because, as their currencies devalue, it becomes harder to cover the interest due on their loans. Iceland, Ukraine, and Poland are all examples of countries in this predicament. Their fate is evidence of the value of the euro to the member states in withstanding the current financial turmoil.

Of course, the contagion on the periphery of the eurozone may threaten even EU states’ financial systems. According to
Stratfor, an on-line analytical body, most of the Hungarian debt is owed to Italian, Austrian and Swedish banks: they dominate the lending across the fragile region, and strains on their resources could bring problems to other non-euro countries such as Romania, Bulgaria, Croatia and Serbia and the Baltic states, according to Stratfor.

Though Hungarian officials insist that the crisis can be controlled, the fact that they have had to accept the IMF package, which comes with strings requiring strict domestic economic reforms, demonstrates how severe the plight of Hungary has become. If Hungary weathers the crisis, the rescue package can actually lead to a stronger national economy because the injection of funds and imposition of reforms will “support the country’s longer-term stabilization and economic restructuring,” Orsalia Kalantzopoulos,
the World Bank director’s for Central Europe and Baltic countries, told the BBC.