Hungary And Ukraine Line Up Outside Support

LONDON, England -- The global credit crisis took a fresh turn yesterday as both Hungary and Ukraine approached international institutions for support in an effort to avoid following Iceland into financial turmoil.

Dominique Strauss-Kahn, IMF managing director.
It was the first time in the 15-month credit crunch that multi-lateral agencies such as the International Monetary Fund had agreed to help bail out European countries - a clear sign of the difficulties debtor nations face raising finance from credit-starved markets.

"Many countries seem to be experiencing problems because of the repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks," Dominique Strauss-Kahn, IMF managing director, told the Financial Times.

"We are ready to support these economies and we are in discussions with a number of them."

In Kiev, Yulia Tymoshenko, prime minister, said the IMF was ready to consider up to $14bn (£8bn) as a special loan to stabilise Ukraine's financial system.

In Budapest, the European Central Bank came up with a €5bn (£4bn) credit line to cover an acute shortage of euros among Hungarian banks.

The moves came amid more turmoil on global markets, with investors focusing on the mounting prospect of recession.

The FTSE 100 closed down 5.3- per cent at a 5½-year low. The decline, combined with Wednesday's 7.16 per cent fall, was its worst two-day performance since the crash of October 1987.

It followed steep falls in Asia, where Japan's Nikkei 225 index fell 11.4 per cent, its worst one-day decline since 1987.

In a day of extreme volatility on US markets, the S&P 500 closed up 4.3 per cent, having been down as much as 4.6 per cent. The Vix index - Wall Street's "fear gauge" - hit a record 81.17 during the day.

Authorities in both Ukraine and Hungary insisted they were not in difficulties. Hungary's forint, which had lost 7 per cent the day before, edged up 1.5 per cent, but stocks fell sharply.

In Kiev, the hryvnia dropped 3 per cent against the US dollar and equities plunged 5 per cent, taking them down nearly 80 per cent on the year.

The ECB's €5bn facility for Hungary marked the first time it has publicly extended support outside the eurozone to a European Union member. The bank, which has occasionally made unpublicised loans, is not expected to give credit to non-EU states.

The IMF said this week that it was also ready to help Budapest.

Hungary has run into trouble with borrowers taking out foreign currency loans, which are now drying up in the global credit squeeze, compounded by heavy budget deficits.

Ukraine's banks are facing difficulties repaying foreign credits just as the current account is widening, with a slump in demand for steel, the country's main export.

The troubles in Kiev are complicated by political turmoil and the prospect of early elections in December. Ms Tymoshenko said the country could need $3bn-$14bn in IMF support but officials emphasised the funds were not required immediately.

The two countries' difficulties are echoed elsewhere in eastern Europe, including Russia and Poland.

Source: Financial Times