The IMF, the European Union and World Bank launched a $25.1bn rescue package for the Republic of Hungary this Tuesday to stave off a potential default on foreign debt and boost investor confidence, halting the country’s march to financial collapse.
In a bigger deal than expected, the IMF is providing $15.7bn, the EU $8.1bn and the World Bank $1.3bn over the next 17 months. This is the biggest sovereign rescue since the start of the global credit crunch and the first for a EU nation. Five year credit protection for Hungarian sovereign debt (A2/BBB+/BBB+) fell from as high as 605bp last week to 314bp as EuroWeek was going to press. A debt capital markets banker in London said: "This is a significant liquidity boost and policy anchor that will help stabilise Hungarian assets and improve investor perception of the region."
Reliance on external financing and the large build-up of foreign exchange borrowing has heaped contingent liabilities on the government with the economy set for recession next year. The country’s external debt stands at 96% of GDP while its currency, the forint, has dropped 50% against the dollar since July. An emergency 300bp interest rate hike this week failed to stem the decline.
The country’s external payment obligations over the next year total around Eu32bn and the central bank has Eu17bn of reserves in its arsenal. The off-market financing arrangement will help fund the national budget as the domestic government securities market has been closed for months.
The sovereign last issued internationally this June with a Eu1.5bn 10 year bond. Around Eu1bn of foreign debt is due to expire in the first half of 2009. The IMF rescue package will help bring short term foreign currency liquidity into the banking system as well as force the government to reduce spending and pursue austere structural reforms, says Barbara Nestor, an analyst at Commerzbank.
"This package has been put together in a timely manner in a way that addresses the vulnerable areas. Those that hold Hungarian debt securities needed to be reassured and this package should go some way in doing this."
Some estimates suggest that private sector borrowers will struggle to roll over only around $4bn of debt that matures over the next year. With this international rescue package, this is a manageable contingent liability for the government, concludes Nestor.
As abrupt credit contraction imperils markets globally, the Hungarian government securities market will only come back to life when western policy efforts to inject market liquidity to the international financial system are successful.