ANALYSIS:The $25 billion IMF loan secured by Hungary has not lifted the recession threat in eastern Europe, writes Daniel McLaughlin

EMERGING MARKETS in eastern Europe rallied yesterday after Hungary secured an IMF-led loan of more than $25 billion. However the threat of recession continued to dampen confidence in prospects for the region.

Hungary's main share index experienced its sharpest rise in 10 years, while Prague's PX index gained a record 13.2 per cent. Stock exchange benchmarks in Poland and Romania climbed more than 5 per cent, while Russia's Micex index climbed 11 per cent.

In New York, the MSCI Emerging Markets Index added 3.9 per cent in early trade.

Hungary's currency, the forint, rose against the dollar, as did the Polish zloty, Romanian leu, both the Czech and Slovak koruna and the Bulgarian lev, as markets digested a loan to Budapest from the IMF, the European Union and the World Bank. The loan was twice as large as analysts had predicted.

"This loan package was very good news and gave some relief to investors in the region," said Andras Pinter of fund management company Budapest Alapkezelo.

The size of the deal though also revealed the scale of the problem facing Hungary and its neighbours, most of which have enjoyed well over a decade of growth but now face a sharp slowdown and trouble servicing the budget deficits and large external debt.

"This clearly illustrates that the financial crisis is significantly greater in central and eastern Europe than most market participants have been willing to accept until now," said Danske Bank chief analyst Lars Christensen.

"The fact the EU is so directly involved indicates that the EU is afraid that, if Hungary were allowed to implode, the crisis could rapidly spread to the other central and eastern European countries."

In Ukraine, where the hryvnia currency has hit all-time lows, parliament belatedly gave initial approval to legislation that is needed to access a $16.5 billion IMF loan, after squabbling between allies of the country's feuding president and prime minister delayed the vote.

With world demand for its main exports of steel and chemicals decreasing, Ukraine's central bank chairman Volodymyr Stelmakh warned that failure to secure the IMF credit would lead to "spiralling inflation, double-digit inflation - very high - as well as moral discredit and declaring default".

He added: "If the IMF programme is confirmed, it will mitigate against any request for early return of credits in the corporate sector and allow for a balance between supply and demand." he said.

Major credit ratings agencies have downgraded their forecasts for the Baltic states, the Balkans, Hungary and Ukraine over the last month, largely because of their reliance on foreign debt and their rapidly slowing economies, which are expected to suffer difficulties for some time.

While a slowdown also threatens countries such as Poland, Slovakia, the Czech Republic and Slovenia, they are seen as less vulnerable to the current crisis because their credit markets have not expanded so quickly and their foreign debts are more moderate than those of their neighbours.

In Belarus, where almost all of the economy is controlled by the regime of president Alexander Lukashenko, officials said they would liberalise their economic policies as they seek a $2 billion credit from the IMF.

"In the current situation, we don't need this money . . . but we don't know how deep the global crisis is," said the deputy head of the central bank, Vasily Matyushevsky.

"Belarus is asking for the loan, but it is not in crisis," said the deputy head of the central bank, Vasily Matyushevsky.

He also said that the IMF had not placed any conditions on the loan, adding: "But in any case, Belarus will move toward liberalising key economic policies.""

IMF officials were in talks with Serbia yesterday over how to help its economy, but the fund insists it is not currently discussing emergency loans with any nations other than Hungary, Ukraine, Belarus, Iceland and Pakistan.

Nervous markets remain on the lookout for countries in trouble.

Neil Shearing of London's Capital Economics said: "If other countries, such as Turkey or Romania, go cap in hand to the IMF, we are looking at a recession across the whole region."