THERE IS a welcome strategic aspect to the International Monetary Fund's rescue plan for Hungary, announced along with funding from the European Union and the World Bank. The $25 billion package is at least twice what was expected. It is intended to head off speculative pressure directed not only against Hungary but against other central and eastern European economies.
Their extensive exposure to the world financial crisis became clear over recent weeks. Although this varies substantially among them it is hoped the decisive action to bolster Hungary's economy will help Ukraine, Belarus, Romania, Latvia, Lithuania and Estonia by preventing a bankruptcy that could lead to many more. Hungary's widening budget deficit, large external indebtedness and extensive reliance on international financing for mortages and foreign currency loans suddenly imploded over the last month. Foreign investors sold off assets held in the Hungarian currency, driving it down along with the country's stock and bond markets to the point where emergency funding became essential.
Bringing in the IMF to rescue an economy in the EU is very unusual, making this intervention a significant policy departure during the world financial crisis. The fact that it has been done in concert with the EU echoes the frantic round of planning going on this week in Brussels ahead of the Group of 20 meeting in Washington on November 15th to redesign international financial institutions, in which EU states will take a major role. The IMF's rules are already being adjusted to allow easier and greater emergency drawdowns by financially healthy states to avoid speculative attacks. Its overall funding is quite inadequate to deal with this crisis. Similar changes in its Stability and Growth Pact have allowed the EU to lend $8.4 billion to Hungary and to increase the availability of funding for other states in difficulties.
In neither case do these loans come without conditions - and nor should they. Hungary has been particularly irresponsible in its state finances since the end of communist rule, as successive governments from left and right ignored warnings about borrowings and deficits. Socialist prime minister Ferenc Gyurcsany has agreed to cut some welfare benefits, including a 13th month payment, and to freeze public sector pay in an effort to reduce the current budget deficit. The opposition Fidesz party attacks the loans as a breach of Hungarian sovereignty. But many welcome the intervention as a way to impose discipline where none existed before.