A HUGE international loan boosted Hungary's currency and stock market yesterday, but came with demands for austerity measures which are likely to bring hardship to most residents of the beleaguered central European state.
The International Monetary Fund (IMF), the European Union and the World Bank combined to pledge $25.1 billion to support Hungary - double the amount expected by analysts - as it struggles to secure credit on global markets to service a mountain of debt denominated in foreign currencies.
IMF managing director Dominique Strauss-Kahn said the deal would "bolster the economy's near-term stability and improve its long-term growth potential".
"At the same time, it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets," he said.
Hungary's gaping budget deficit, large external debt, reliance on international financing and the high proportion of foreign currency loans and mortgages held by residents, made the country particularly vulnerable as the global financial crisis unfolded and credit began to dry up.
Foreign investors quickly sold assets denominated in forints, wiping 20 per cent off the cur- rency's value, and drove the Budapest stock market down to four-year lows, while a paralysed bond market left the central bank unable to raise cash to service the country's debts.
To encourage investors to keep cash in Hungary, the central bank raised interest rates last week by three percentage points to 11.5 per cent, but that failed to kick-start the bond market or support the currency.
Yesterday, the forint rose 2.5 per cent and the Budapest stock market gained 12 per cent - its biggest jump in a decade.
"The overall package is impressive both in terms of its size and in terms of the institutions providing funding," said Martin Blum, a Vienna-based economist at UniCredit bank.
In return for the bailout, Hun-gary's Socialist prime minister Ferenc Gyurcsany has agreed to cut welfare spending and freeze salaries and cancel bonuses for public sector workers in an attempt to reduce next year's budget deficit to 2.6 per cent of gross domestic product.
With recession looming, the austerity measures - coming on the back of spending cuts that have already made Mr Gyurcsany deeply unpopular - are unlikely to improve the Socialists' chances of re-election in 2010.
"It is shameful that we have got to this point," said opposition leader Viktor Orban, calling the IMF loan "a leash" which would restrict Hungary's sovereignty.
