Hungary Succeeds in Early Return to Market Financing

• Author: International Monetary Fund

Hungary, one of the countries hardest hit by the global financial crisis, received an emergency $25 billion financing package from the IMF and other institutions in October 2008. Since then, the government has implemented a series of measures designed to restore health to its economy. The success of the euro-denominated bond issue shows how effective these measures have been in winning back the trust of investors.

"Hungary has regained access to international finance, which is a testimony to the progress the Hungarian authorities have made in pursuing the right policies to address the effects of the crisis," said James Morsink, the IMF's mission chief for Hungary.

Confronting the crisis

Hungary was one of the first emerging economies to be hit hard by the global crisis. Global deleveraging in the fall of 2008 led to immediate financing difficulties for Hungary, with its high levels of government and external debt.

Signs of external financing difficulties were evident. Interest rates on government debt shot up, the secondary market for government securities froze, and primary auctions of government bonds had to be suspended. The exchange rate depreciated rapidly and the swap market for foreign exchange dried up. Since a large share of bank loans were denominated in foreign currency, households and corporations experienced debt-servicing difficulties as the exchange rate depreciated. This, in turn, triggered concerns about the health of the banking system.

Policy response

In response to the crisis, the government of Hungary improved its economic policies in two key areas: fiscal sustainability and financial stability. To ensure that it would be able to repay its debt in the future, the government reduced its spending in a durable way. At the same time, to avoid exacerbating the economic contraction, the authorities allowed the fiscal deficit to increase somewhat. Altogether, the government is expected to improve its underlying fiscal position by about 4 percentage points of GDP in 2009, and a further 1 percentage point of GDP improvement is planned for 2010. This means that, once economic activity fully recovers from the crisis, the overall government budget should be close to balance.

Hungary's fiscal strategy aims at protecting the poor and low-income earners from the impact of the crisis-for instance, by preserving the purchasing power of low-income civil...