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Olexander Prokopenko/Pool/AP
Ukraine's Prime Minister Yulia Tymoshenko, right, during a meeting with IMF delegation in
Kiev, Ukraine, Friday, Oct.17, 2008.

IMF Gives Ukraine and Hungary Helping Hand

October 27, 2008 04:01 PM
by Anne Szustek
The International Monetary Fund is stepping in to inoculate Eastern Europe’s developing markets from the credit crunch virus hitting other economies.

IMF Keeps Eastern European Emerging Economies Afloat

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Hungary and Ukraine are to be getting a boost from IMF loans. The Washington-based international economic oversight body agreed this past weekend on a $16.5 billion loan over 24 months to Ukraine, contingent on the country making financial sector reforms and balancing its budget. The terms of Hungary’s rescue package are still being negotiated.

The hyrvnia, Ukraine’s national currency, dropped 14.2 percent against the U.S. dollar last week, hitting a record 6.0812 against the dollar on Oct. 24.

On top of its flagging currency, translating into more expensive imports at home, global prices have fallen for Ukraine’s key exports, such as steel. Annual inflation rates hit an all-time high of 31.1 percent in May, falling to a still lofty 24.6 percent in September. Ukrainian Central Bank Governor Volodymyr Stelmakh said earlier this month that the country’s current-account deficit could grow to some $15 billion this year.

Hungary’s economy has also taken a tumble amid the global credit crunch. Last week the dollar also gained 9.4 percent against the Hungarian forint in spite of the country’s central bank’s 3 percent interest rate increase to 11.5 percent. The country’s stocks and bond markets have also taken a wallop.
Hungarian Prime Minister Ferenc Gyurcsany was quoted as saying by Bloomberg Monday that the proposed bailout will be “convincing in size and strength.” Christoph Rosenberg, the IMF’s senior representative to Eastern Europe and the Baltic states, told Bloomberg during a phone interview that the organization “has agreed on a policy package. … Putting together a financing package will require a few more days.”

Foreign currency information site ActionForex argues that much of the instability in emerging market currencies was because “speculators took note of depleting reserves needed to defend them.” Also playing into the risk profile is perceived political instability in Ukraine, which is holding its second national elections in two years in December. Amid political squabbles with former backer Prime Minister Yulia Tymoshenko, President Victor Yushchenko dissolved the Verkhovna Rada, Ukraine’s parliament, on Oct. 9.

Two days earlier, Ukraine’s central bank took over the country’s sixth largest bank, Prominvestbank, in light of a heavy bank run.

Analysts on European policy heralded the moves as key to containing the global financial bug. Capital Economics economist on Emerging Europe Neil Shearing feels that the brunt of the credit crunch has yet to hit the developing economies of the Continent: “the most vulnerable countries in the region have yet to be hit by the crisis,” he told the BBC. “Accordingly, it seems the IMF’s work has just begun.”

Over the past month the MSCI Emerging Market Index has gone 42 percent down in value, dropping as low as 5 percent on Monday.

Background: Emerging markets tap into IMF funding

The IMF pledged $2.1 billion in loans last week to Iceland, which has been teetering on the brink of bankruptcy. The Scandinavian country, whose economy is lopsidedly based on the financial sector, is also asking for an additional $4 billion from its fellow Nordic states. Like Ukraine, it has stepped in to take over struggling financial institutions, putting its three major banks under government control.
Between July 2007 and October 2008, the Icelandic krona dropped more than 46 percent against the euro, prompting the country to peg its currency to the euro and seek a €4 billion (about $5.7 billion) loan from Russia to shore up its reserves and help bolster its currency. But Russia is also facing a cash crunch in light of steeply dropping oil and gas prices, casting doubt over the likelihood that the loan come to fruition.

The Hungarian forint, the Icelandic krona and the Polish zloty have been the three poorest-performing currencies against the euro over the past three months, according to Bloomberg.

Swedish Prime Minister Fredrik Reinfeldt
said at a Monday news conference about the issue that the Scandinavian states would form a working group to discuss any bailout plans, although he was not certain how much would be lent to the country.

“I do not have that amount today,” Reinfeldt said at the conference.

Pakistan, which edged back into the black after loan pledges from other countries and the Asian Development Bank, and Belarus are also in negotiations for IMF funding.

Key Players: International Monetary Fund

The IMF is the world’s primary monetary oversight organization. It keeps track of exchange rates and international payment balances.

Representatives from 45 countries convened in July 1944 in Bretton Woods, N.H., to discuss establishing international economic policy to avoid a repeat of the protectionist economic policies that had led up to the Great Depression of the 1930s. What came of the talks led to the founding of the IMF, which was officially founded in December 1945 when the first 29 member countries ratified its Articles of Agreement. The organization now has 186 member nations.

The World Bank also came out of the Bretton Woods talks. Countries must be IMF members to be eligible for World Bank membership.

The IMF lends money to countries with international balance of payment problems on the condition that they implement certain financial reforms, often known collectively as the “Washington Consensus.” This includes reform to taxes, privatization of state-run enterprises, market-determined interest rates and liberalization of trade.
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