Hungary has become the latest country to receive a multibillion-dollar bailout to help it tackle the effects of the global financial crisis. It has been promised $25.1bn (£15.4bn) by the International Monetary Fund, the World Bank and the European Union to help shore up its beleaguered banking system and currency, the forint.
Similar measures have already been taken to prop up the economies of Iceland and Ukraine, while the IMF is in talks with Pakistan and Belarus about loans to help them through the crisis. The Hungary package, which was much larger than expected, marks the first time in the EU's history that a member state has been rescued by the IMF. However, the deal came with strings attached, with the IMF insisting on an introduction of austerity measures to curb high public spending.
Like a number of fast-growing nations, Hungary fell victim to the credit crunch by borrowing heavily from foreign banks to finance its break-neck economic development. Iceland was given $2.1bn of assistance by the IMF last week, while Ukraine is to receive $16.5bn from the fund.
The IMF has about $250bn available through various schemes to help nations in financial trouble. So far, only a relatively small proportion of that has been committed; the worry now is that if a large economy were to threaten to default on its debts and ask the IMF for assistance, its funds could be more severely stretched.
John Lipsky, the IMF's first deputy managing director, conceded that it might need more resources. "If the problems continue to grow, we might think about whether we would need additional resources and we will be discussing with our members that possibility," he said yesterday. "For now, we have record liquidity."
Gordon Brown has also warned that the IMF might not have enough cash to answer every request for aid. The Prime Minister is on a diplomatic offensive to secure more funding and further reform of the IMF, and will visit the Gulf states this weekend. He said: "It is becoming increasingly clear to me that we cannot delay and that we now need substantial additional resources in addition to the $250bn the IMF already has available."
Mr Brown said the additional funds ought to come from nations such as the United Arab Emirates and China, which have large trade surpluses. "Yes, we will play our part, but the biggest part can be played by countries that have got the biggest surpluses," he said.
Beijing has said it is willing to co-operate but it wants more votes at the IMF in return. The fund has long been dominated by the US and Europe and the role of the new economic powers, such as China, India and Russia, has been a sore point for years. On Tuesday, the Chinese Premier, Wen Jiabao, said: "The right of emerging and developing countries to know what is going on, have a voice and the right to set rules should be improved."
In Hungary's case, the IMF has said it will provide a stand-by fund of $15.7bn – effectively an overdraft – that the Budapest government can draw on to stabilise the forint, which has fallen sharply in value in recent weeks. The EU has offered a loan of $8.1bn and the World Bank will provide $1.3bn.
The flight of capital from emerging economies has caused considerable turbulence, as Western banks and investment funds have withdrawn their money from the stock markets, government bonds and other securities in nations such as Hungary. The scale of withdrawals has reached panic stage as investors fret about defaults or the reimposition of capital controls. Few lenders, investment managers or insurers want customers to suffer the same fate as those left stranded by the failure of Icelandic banks earlier this month.
According to the Bank of England's latest financial stability report, hedge funds may also have had a role in destabilising emerging markets and thus, indirectly, costing the world's taxpayers more money. This is because all IMF funding comes from sovereign states and, ultimately, their citizens.
Hungary is unlikely to be the last nation to seek IMF help. Serbia was in talks before the current crisis, while Pakistan and Belarus are thought to be close to agreeing terms. An even longer list of potential supplicants includes Estonia, Latvia, Lithuania, Turkey, Bulgaria, Romania and Brazil.
All of them, like Ukraine, Iceland and Hungary, must agree to further market reforms and other conditions for their loans. Iceland has had to raise interest rates by six per cent to 18 per cent, while the Hungarian government was ordered to make extra spending reductions, including a cut in its welfare budget and public sector wages.Reuse content