BUDAPEST (Reuters) - An IMF rescue deal steadied Hungary’s battered currency on Monday, but a downgrade in Romania’s debt rating to “junk” status showed the ripples of the global crisis were still spreading across emerging markets.
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 finalize 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, emerging Europe has watched foreign investors once bullish on the region’s prospects of strong economic growth and deeper integration into the European Union dump their assets.
In particular, there is concern that countries like Ukraine and EU members Hungary, Romania, Bulgaria and the Baltic states may not be able to handle their large foreign debt burdens, which could spark financial crises.
News of Hungary’s IMF deal sent the forint 2 percent higher. The currency’s almost 20 percent dive in the last month had spooked investors across the ex-communist bloc, previously seen as safer than most other emerging economies.
“The purpose ... is to create a safety net for Hungary,” Prime Minister Ferenc Gyurcsany said.
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.
Budapest turned to the IMF 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.
Ratings agency Standard & Poor’s cited just such a reason when it cut Romania’s sovereign rating to junk status on Monday and said its outlook was negative, sending the leu currency 3 percent lower to a 10-day low against the euro.
It also cut to stable from positive its outlook for Poland — where a deputy finance minister warned of capital flight on Monday from Polish units to their euro zone-based owners — due to falling international markets and tightening credit.
S&P said it had cut Romania because of mounting risks to its real economy due to rising private sector debt and a dependency on its need to borrow on increasingly uncertain foreign markets.
It said policymakers had ignored warnings and were instead focused on general elections scheduled for November 30.
The IMF did not disclose the size of its package for Hungary, 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.
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.”
Providing a shot in the arm for Hungary’s ailing economy, Germany’s Daimler signed a deal with the government to invest 800 million euros ($995.4 million) in a new plant that will produce over 100,000 compact cars a year from 2012.
Despite improved sentiment, 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.
Hungary’s government and central bank have scrambled to reassure investors that the foreign-dominated banking system is stable and have tried to jump start the all-but-frozen markets 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 a boom in lending to households and companies.
(Additional reporting by Sandor Peto, Gergely Szakacs, Balasz Koranyi, and Michael Winfrey in Prague)
Writing by Krisztina Than and Michael Winfrey; Editing by Jon Boyle