Hungary Gets IMF Help 'Financial Contagion' Spreading in Developing World

With a number of developing countries now turning to the International Monetary Fund for help, the IMF itself may need some assistance. British Prime Minister Gordon Brown says a number of countries must join forces to stop the spread of the "financial contagion."


It's been called the second wave of the financial crisis. First banks were having difficulty gaining access to much-needed liquidity. Now, though, a number of developing countries around the world have been hit hard as foreign currency has evaporated and the value of local currencies has plunged. They are frantically looking for help -- and the international institutions that provide such help may require additional funding themselves.

A number of countries are struggling under a shortage of hard currency -- including Pakistan.
REUTERS

A number of countries are struggling under a shortage of hard currency -- including Pakistan.

Hungary was the latest country to secure an international helping hand, in the form of a €20 billion ($25 billion) loan package agreed to on Tuesday. European Union governments are to supply €6.5 billion of the total with the International Monetary Fund on the hook for €12.5 billion and the World Bank throwing in another €1 billion, according to a statement released by EU finance ministers in conjunction with the European Commission.

In return for the emergency loans, Budapest commits itself to tightening up its budget policies, including a reduction in the country's overall debt as well as a commitment to balancing its budget. The help became necessary this month as the value of the Hungarian currency, the forint, has dropped by 20 percent against the euro in the last four weeks as a result of restricted access to hard currency. The forint's fall has made it difficult for Hungarians to pay back housing and other loans taken out in foreign currencies. Prime Minister Ferenc Gyurcsany said on Tuesday that he expects his country's economy to contract by 1 percent this year.

Spreading to Developing Countries

The loan comes as European leaders have begun pushing for the international community to make more money available to help stem the further spread of the financial crisis to more developing countries. French President Nicolas Sarkozy said on Tuesday that he plans to propose an increase in the amount of money the EU can make available to member states not in the euro-zone. He would like to see the maximum raised from the current €12 billion to €20 billion.

Earlier in the day, British Prime Minister Gordon Brown said that the IMF would likely need much more than the $250 billion it currently has available to help out countries in need. Brown didn't put a number on the potential shortfall, but he said "we must act now, we must set up the fund as quickly as possible." He indicated that countries with large currency reserves, like oil exporters and China, may be asked to take the lead.

In pitching the idea, Brown also voiced concern that the "financial contagion" could spread to yet more developing countries. "It is in every nation's interest and in the interests of hardworking families in our country and every country that financial contagion does not spread," he said in London.

The assistance for Hungary comes just days after the IMF agreed to a $16.5 billion loan for Ukraine in an attempt to forestall a financial meltdown in the country. On Tuesday, however, the parliament in Kiev was unable to pass legislation required as a precursor to that loan. It remains unclear exactly what conditions the IMF has placed on the loan, but according to the Associated Press, draft legislation indicates that cuts to the social system and an increase in taxes may be coming.

Ukraine plans to take another stab at passing the necessary legislation on Wednesday. But the country remains in a political deadlock as President Viktor Yushchenko continues to battle Prime Minister Yulia Tymoshenko over new elections. A sharp reduction in global demand for steel -- an industry which accounts for 6 percent of Ukraine's gross domestic product and 40 percent of its exports -- has hit the country hard and has contributed to a collapse of the Ukrainian currency, the hryvna, as foreign currency inflows have dried up.

Pakistan Next?

But Hungary and Ukraine are not the only countries in need of help from the IMF and the international community. Belarus may also be planning to ask for emergency aid. And Pakistan may ask the IMF for an emergency loan as well if it cannot find funding from its allies. Pakistan is eager to avoid the tough conditions the IMF would likely impose in exchange for such a loan. A statement released on Tuesday by the Pakistani Foreign Ministry said that President Asif Ali Zardari "underlined the government could ill afford financial assistance from the IMF with tough conditions," in talks with a British envoy.

German Foreign Minister Frank-Walter Steinmeier, in Pakistan on Tuesday, indicated that the country likely had little choice but to formally request help from the IMF. "I hope the decision will be taken soon. It won't help to have it in six months, or six weeks. Rather, we need it in the coming six days," Steinmeier said at a press conference in Islamabad.

Iceland too is looking for more money in addition to the $2 billion emergency loan it has already received from the IMF. The central bank in Reykjavik on Tuesday increased its key interest rate by a whopping 6 percentage points to comply with IMF conditions on that loan. The jump reverses a 3.5 percent cut made earlier this month and raises the rate to a record high of 18 percent in an effort to keep foreign currency in the country.

Still, the country may need more help with Prime Minister Geir Haarde indicating that he is looking for an additional $4 billion. He told the Associated Press that he was hoping to get the additional funding from other Nordic countries.

cgh -- with wire reports

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