An IMF rescue deal steadied Hungary's battered currency on Monday, but the ripples of the global crisis spread to other emerging markets, with Polish and Turkish officials saying more steps were needed to boost confidence.
After reaching a $16.5 billion loan agreement with Kiev to shore up Ukraine's teetering economy, the International Monetary Fund said on Sunday it would finalise a deal with Budapest in the next few days to bolster Hungary's near-term stability.
Facing the worst global financial crisis since the 1930s, the countries need the IMF's help to restore confidence in their currencies and bonds after investors dumped their assets over worries that an inability to finance large foreign debt obligations could spark balance of payments problems.
Hungary needs IMF help — unprecedented for a European Union member state — to shore up its markets after investors sold off Hungarian assets on worries over its banking system and the financing of its large external debt.
The forint currency's almost 20 percent dive in the last month has unnerved investors elsewhere in the EU's fast-growing ex-communist bloc, previously seen as a safer bet than most other emerging economies.
"The purpose … is to create a safety net for Hungary," Prime Minister Ferenc Gyurcsany said. "We want the world to see that Hungary can surround itself with friends who will be able to protect it."
The IMF did not disclose the size of the package, but analysts said it should be over $10 billion, based on the IMF's agreement in principle with Ukraine to a $16.5 billion standby loan, also announced on Sunday.
"The policies Hungary envisages justify an exceptional level of access to Fund resources," IMF Managing Director Dominique Strauss-Kahn said in a statement.
Meanwhile, Standard & Poor's cut its credit outlook for Poland to stable from positive, citing a deterioration in international markets and tightening credit conditions.
Turkey's central bank governor said he would welcome some form of arrangement with the IMF, adding to growing calls for the government to strike a deal [ID:nLR326332].
Romania's leu also sank to a 10-day low on Monday after Standard and Poor's downgraded its foreign debt to junk status.
BUYING TIME
Analysts said the Hungarian package could give support to the forint in the short term and would likely set conditions for the government to tighten state spending further.
"The package will be fairly large, an amount exceeding $10 billion," said Eszter Gargyan at Citigroup. "Hopefully it will have conditions which would require structural changes to ensure a sustainable fiscal position."
The forint traded at 272.30 versus the euro, up from its opening level of 275.00, at 1428 GMT, after plunging as low as 285.30 in off-session trading last week.
But Hungary's debt agency scrapped a two-month T-bill auction on Monday as demand has remained low, and the stock market was down 6.9 percent.
"The market is nervous, it needs more time to calm down," a fixed income trader said.
Separately, German carmaker Daimler signed a deal with Hungary's government to invest 800 million euros ($995.4 million) in a new plant in Hungary that will produce over 100,000 compact cars a year from 2012 and provide a shot in the arm for the country's ailing economy.
DEVIL IN THE DETAIL
The IMF's help is also aimed at providing support for the Hungarian banking system.
Hungary's government and central bank have scrambled to reassure investors that the banking system, in which foreign ownership dominates, was stable, and re-start an all-but-frozen market for foreign currency swaps and government bonds.
The main problem is a strong demand for FX funding, particularly in euro and Swiss francs, in the banking sector after dynamic growth in lending to households and corporates.
Hungarians in the street were sceptical about the IMF help.
"Generally if someone takes out a loan it means there is trouble," Budapest resident Mihaly Friss said.
Others were more hopeful.
"If they help Hungary, I guess it will help us in some way to fight this crisis," Zalan Szitnyai said.
