IMF fails to quell jitters in eastern Europe

MAJOR LOAN packages from the International Monetary Fund to prop up Ukraine and Hungary failed to quell financial jitters yesterday, as emerging market stocks fell to four-year lows and most currencies weakened across eastern Europe.

The IMF has offered $16.5 billion credit to Ukraine subject to the approval of financial reforms in the ex-Soviet state, and has agreed on a rescue package for Hungary which is believed to be worth more than $10 billion.

Ukraine's hryvnia currency slid to a record low against the dollar, however, and Hungary's BUX share index lost as much as 11 per cent, amid deepening pessimism about economic prospects across eastern Europe, most of which has enjoyed several years of strong growth fuelled by cheap credit and strong domestic demand which is now drying up.

The MSCI Emerging Markets Index dropped to its lowest level since September 2004 yesterday, and has shed 63 per cent this year, while Standard and Poor's cut Romania's sovereign debt rating to junk status on fears that the new EU member may struggle to service its foreign debt.

In Budapest, Hungarian prime minister Ferenc Gyurcsany said his deal with the IMF would help stabilise his country's stocks, bonds and forint currency, all of which have plunged.

"The purpose of the [ deal] is to create a safety net for Hungary so that in the current crisis, the country should have financial resources available besides the usual market resources and so we can defend the Hungarian economy and Hungarian families," Mr Gyurcsany said, as the forint climbed 2 per cent after losing almost 20 per cent in the last month.

Analysts said the package, details of which will be announced in the coming days, would be worth at least $10 billion.

"The policies Hungary envisages justify an exceptional level of access to fund resources," said IMF managing director Dominique Strauss-Kahn. "Participants will include the IMF, the EU, and some individual European governments, together with regional and other multilateral institutions."

Hungary's most serious problem is servicing its large debt, much of which is in foreign currencies, at a time of tightening international credit.

In neighbouring Ukraine, the credit crisis has drained confidence from the banking system, and the slowing global economy has slashed demand for major exports such as steel.

A long-running feud between the president, Viktor Yushchenko, and the prime minister, Yulia Tymoshenko, has also undermined efforts to combat the financial crisis, and could yet delay parliament's adoption of financial measures upon which the IMF credit depends.

Amid growing speculation over which country will be next to seek IMF help, ex-Soviet Belarus has already asked for $2 billion from the fund as credit quickly dried up from both Russia and the West, and Serbia is discussing a programme with the fund which would help boost confidence among investors and lenders.

"With a firm programme, Serbia will be able to get cheaper credits," said finance minister Diana Dragutinovic.

Serbian stocks hit an all-time low yesterday, and the central bank intervened after the dinar currency slipped to its lowest level this year. With little prospect of a swift financial recovery in eastern Europe, analysts said IMF funds would only soften what is likely to be a hard economic landing.

"In more normal times a package from the IMF would be enough," said Beat Siegenthaler, chief strategist for emerging markets at TD Securities in London. "But now we have the worst-case scenario of people pulling out of emerging markets and selling any holding that is not US dollars."