October 16, 2008 / 9:21 AM / 11 years ago

Q+A-What makes Hungary vulnerable in global crisis?

(Adds more vulnerabilities)

Oct 16 - Hungary’s central bank has signed a 5 billion euro deal with the European Central Bank to boost euro liquidity. Hungary’s Prime Minister Ferenc Gyurcsany has said the IMF may be an important ally in stabilising the forint EURHUF=

WHY IS HUNGARY VULNERABLE?

* The country has a large debt — the gross external debt of the Hungarian state and companies amounted to 89.9 billion euros or 93.8 percent of gross domestic product (GDP) in the second quarter of 2008, while net debt was 46.3 percent of GDP.

* This is due to loose fiscal policy pursued since 2001 which boosted the budget deficit to above 9 percent of GDP in 2006 and prompted tough measures by the government to cut the deficit to a projected 3.4 percent this year.

* Hungary is seen posting a current account deficit of 5.3 billion euros or 4.9 percent of GDP this year according to the central bank. Next year this deficit is seen rising because slowing export growth will widen the trade gap.

* Hungary needs to refinance its existing debt by issuing forint-denominated and foreign currency bonds, which could be more difficult because of the global credit crunch.

* Much of the robust private sector credit growth seen in the past couple of years has been also funded externally.

* While the banking system is regarded as stable, the FX swap market all but seized up this week, raising fears that local banks may struggle to hedge their exposure to foreign currencies, which they have lent to Hungarian consumers and companies in a boom in lending. The main problem is the strong demand for FX funding, particularly euro and Swiss franc, in the banking sector.

* If the FX swap market does not start up, the forint may weaken further, and if there is excessive devaluation, to 300 or even weaker levels to the euro, that may increase the risk of households facing repayment difficulties.

* The Socialist government rules in a minority and there is a political risk, because the government needs opposition support to pass the 2009 budget in parliament in December.

* Standard & Poor’s has put the credit ratings of Hungary and Ukraine on review for a possible downgrade due to deteriorating financial sector conditions in both countries.

WHY IS IT DIFFERENT FROM ICELAND?

* Most Hungarian banks are owned by large western European banks and are not thought to have direct exposure to any toxic assets involved in the global financial crisis.

* Hungary is a member of the European Union, giving it increased protection, and aims to adopt the euro.

* Its economy stands on a broader footing than that of Iceland which turned into an international financial haven and whose banks expanded dramatically overseas.

* The forint has firmed in the past years and has been fairly stable since mid-2006 when it last plunged.

* Hungary’s budget deficit has been falling.

* Hungary’s inflation rate fell to a two-year low of 5.7 percent in September while Iceland’s rose to 12.3 percent in May 2008 before the economy came to the edge of collapse.

WHY DID THE IMF STEP IN?

The Hungarian authorities sought IMF help to restore confidence in falling markets last week. The IMF said it was ready to offer technical and financial assistance to Hungary if needed, but the government said it would use it only as a last resort.

WHAT MEASURES DID HUNGARY TAKE TO PROP UP MARKETS?

* The government scrapped tax cut plans for 2009 and said it would cut the budget deficit more than planned both this year and next year, to 3.4 percent and 2.9 percent of GDP respectively.

* Government debt agency AKK said it would cut net forint debt issuance by 200 billion forints in the rest of the year.

* The government offered to guarantee all interbank loans of OTP Bank (OTPB.BU), central Europe’s biggest independent bank, after market rumours it had difficulties triggered a sell-off in its shares late on Thursday. OTP declined the offer saying the bank was well capitalised.

* The government has changed regulations to allow pension funds to invest all of their funds in government bonds and to make bond buying easier, and eased repo collateral rules for banks to boost liquidity.

* The central bank (MNB) introduced one-day euro swap tenders to ease pressure on interbank trading.

* The central bank has signed a 5 billion euro deal with the European Central Bank on repurchase transactions, which will allow the MNB to borrow up to 5 billion euros.

* The central bank has signed a deal with primary bond traders under which the bank will hold auctions to buy government securities to boost market liquidity.

It has also introduced two lending facilities, a weekly tender for two-week, fixed-rate secured loans for an unlimited amount, and also a regular tender for six-month, variable-rate secured loans, for a pre-specified amount.

Reporting by Krisztina Than; Editing by Ron Askew

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