Hungary’s Letter of Intent to the IMF


November 6 2008

Following are excerpts from the a Letter of Intent which Hungary’s central bank and government sent to the International Monetary Fund and published on the central bank’s website on Thursday.

‘Financial market stress in Hungary has intensified in past weeks as a result of events in global financial markets. In response, the government and the central bank of Hungary (Magyar Nemzeti Bank, MNB) have developed a comprehensive strategy to firmly anchor macroeconomic policies and reduce financial market stress. We request that the Fund support our program through a Stand-By Arrangement (SBA) for a period of 17 months in the amount of SDR10.5 billion (EUR 12.5 billion). This arrangement, in conjunction with support of EUR 6.5 billion under the EU’s balance of payment financing facility and other multilateral and bilateral commitments, will signal the international community’s support for our policies.

We have discussed with IMF staff our economic program, which is outlined below. Our main objectives are to (i) reduce the government’s financing needs and improve longterm fiscal sustainability, (ii) maintain adequate capitalization of the domestic banks and liquidity in domestic financial markets, and (iii) underpin confidence and secure adequate external financing. The government is in the process of considering additional steps to improve the competitive position of the economy, which are fully consistent with the program.

‘The first review of the program will take place by February 15, 2009 and the second review by May 15, 2009. We believe that the policies set forth in this letter are adequate to achieve the objectives of our economic program, but the Government stands ready to take additional measures as appropriate to ensure the achievement of its objectives.’


‘Gross external financing needs will decline over the course of 2009, due to the smaller fiscal and current account deficits, and will be partly covered by EU structural funds (a stable source of inflows) and already committed foreign direct investment inflows. We cautiously assume net outflows from the non-financial private sector and a reduction in the government’s net issuance of external debt. Foreign banks, however, are expected to largely maintain their exposure in Hungary (see below). At the same time, we aim to gradually increase the MNB’s foreign reserves as a precaution against unexpected outflows. The resulting external financing need of some EUR 20 billion can be covered by drawing on resources from the IMF, support under the EU’s balance of payment facility and other official creditors. Any additional support from other international financial institutions will be used to further augment our foreign reserves.


‘The government is committed to maintaining fiscal discipline in the long-term, recognizing that this is a key element in retaining investor confidence. We therefore intend to continue budget consolidation in the 2010 budget – to be discussed with IMF staff as part of the program – and beyond; new medium-term fiscal targets will be contained in the forthcoming convergence program and our medium-term fiscal framework. To put fiscal sustainability on a permanent footing, we have already submitted to parliament a draft fiscal responsibility law, which establishes fiscal rules on public debt and primary deficit, strengthens the medium-term expenditure framework (rolling three-year expenditure ceilings) and creates a fiscal council to provide independent and expert scrutiny. We plan to enact this law by end-December 2008 (a structural benchmark).’


‘The Hungarian banking system complies with regulatory capital requirements and has been profitable. Liquidity risk has recently increased due to the drop in global risk appetite which has increased banks’ funding costs and shortened maturities. However, most of the external funding comes from parent banks in the euro area, which now have access to liquidity through ECB facilities and which have pledged their continuous support of their subsidiaries in Hungary, as reaffirmed in the joint statement of MNB and leading banks in Hungary of October 17, 2008. The MNB and the HFSA will monitor this commitment closely, and provide summary information on a daily basis to IMF staff. Domestic funding has not shown any signs of stress and any stress would be contained by the liquidity facilities mentioned below. In addition, the government has not only increased the level of deposit insurance coverage of retail deposits from HUF 6 million to HUF 13 million (in line with EU agreements) but also pledged to provide a blanket guarantee on all deposits. The government stands ready to take further measures to ensure the stability of bank funding, if needed.

We have developed, in consultation with IMF staff, a comprehensive package of support measures available to all qualified domestic banks, to buttress their credibility and confirm our commitment to preserving their key role in the Hungarian economy. The domestic banks have entered this period of market stress with strong solvency positions, which they have been able to preserve so far in spite of the severity of the turmoil. We are nevertheless in the process of providing a support package in line with best practices, ensuring a level playing field within the EU. The banking sector package contains provisions for added capital and funds a guarantee fund for interbank lending. Funding will be divided as follows: Total funding of HUF 600 billion will be divided evenly between the Capital Base Enhancement Fund and a and the Refinancing Guarantee Fund. The Package is available to private Hungarian banks of systemic importance. The Capital Base Enhancement Fund has been sized to bring the eligible banks’ capital adequacy ratio (CAR) up to 14 percent. The Guarantee Fund is meant to bring comfort to the providers of wholesale funding and secure the refinancing of the eligible banks. Its endowment of HUF 300 billion will be invested in euro denominated government bonds of Euro area countries and managed by the MNB. Open for new transactions until end-2009, it will guarantee the rollover of loans and wholesale debt securities with an initial maturity of more than 3 months and up to 5 years, against a fee and with appropriate safeguards. This package should also ensure that the domestic banks remain capable of playing a responsible role vis-à-vis their foreign subsidiaries. We will submit a bill to this effect to parliament by November 10 and request an extraordinary procedure to pass the bill as soon as possible (structural performance criterion). We will monitor carefully the impact of a possible deterioration of borrowers’ capacity to repay their loans as the economy slows. Recent pressures on banks’ funding are being addressed by their management in close coordination with the HFSA and MNB. We welcome the involvement of EBRD in further strengthening the Hungarian banking system.’

(Reporting by Krisztina Than; editing by David Stamp)


October 27 2008

By Krisztina Than


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)


Hungary to give banks $3 billion capital boost

BUDAPEST, Hungary (AP) — Hungarian financial authorities say they are ready to provide local banks up to 600 billion forints ($3 billion, 2.3 billion euros) to boost banks capital and help them refinance debts.

The government plans to present the package to parliament on Monday and ask for speedy approval. Half would be guarantees to help the banks refinance.

Hungary would get a stake in the banks participating in the state aid.

The aid package for banks comes as part of the $25.1 billion standby loan for Hungary announced last month by the International Monetary Fund, the European Union and the World Bank.


Published in: on November 6, 2008 at 12:06 pm  Comments Off on Hungary’s Letter of Intent to the IMF  
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