IMF rescue for Eastern Europe
Second epicentre of global financial crisis

By Jon Fernquest

In the last two weeks the IMF has approved a $2.1 billion financial rescue package for Iceland, $16.5 billion for Ukraine, and now a whopping $25.1 billion for Hungary to be disbursed over 17 months.

The European Union threw in an extra $8.1 billion and the World Bank another $1.3 billion for Hungary (Hungary highlighted in map of Europe to the right).

This is largest rescue package for an emerging market economy since the beginning of the global financial crisis and also the first for a member of the European Union.

European bank exposure in Eastern Europe

Emerging market financial sectors may become the "second epicentre" of the global financial crisis.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to rapidly rising credit default risk in Eastern Europe:

They account for three-quarters of the total $4.7 trillion (£2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn...

Austria’s bank exposure to emerging markets is equal to 85pc [percent] of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama (Source: Telegraph, 26-10-08, link, cited in Seeking Alpha, based on Bank of International Settlements quarterly report). 

Credit default risk for Eastern Europe increasing

Rakesh Saxena of banking fame in Thailand notes the rapidly rising cost of credit default insurance in the price of credit default swaps (CDSs) for Eastern Europe:

Roots of Hungarian credit crunch

Hungary has been highly dependent on money borrowed from foreign countries:

Roughly 30 percent of Hungary’s public debt and about 60 percent of loans to businesses and individuals are denominated in foreign currencies, making the country vulnerable to a drop in its currency.

Many home mortgages, for example, were denominated in Swiss francs, as borrowers sought lower rates than they could get at home. That raised the danger that their house payments would soar if the currency declined, something that became a reality when the forint lost 22 percent of its value against the euro from mid-July to mid-October (Source: New York Times, 29-10-08, link).

In the last few months the global financial crisis has made an already sluggish economy even worse. Foreign investors have pulled their money from the country,making the currency worth less and foreign loan repayments much more expensive:

The country also suffers from high public debt and anemic growth, scaring risk-averse investors and leading them to take their money out of the country. Banks in Austria, Italy and Germany dominate the Hungarian market, and the possibility of widespread defaults on Hungarian debts had raised the prospect that
those banks would be badly hurt, increasing the pressure on the European authorities to help.

IMF rules changed to deal with the crisis

IMF rules have been made more flexible and emergency rapid-response procedures put in place to deal quickly with problems as the credit crisis spreads (See IMF article and Dani Rodrick).

The IMF rescue package for Hungary is more than 10 times Hungary's IMF quota.

The maximum amount that can be borrowed by IMF members from IMF funds is usually limited to three times the member's IMF quota.

Each member state's IMF quota is determined by how much money it contributes to the IMF (financial commitment) which is related to the country's size in the world economy. The IMF quota of a country also determines the country's voting power in the IMF.

For Brazil an even larger financial rescue package may be necessary, according to George Soros:


(Source: Bangkok Post, business, LESLEY WROUGHTON, 30-10-2008, temp-link)

Vocabulary:

an epicentre, an epicentre of an earthquake -  the point where an earthquake starts and is felt most strongly
the IMF - the International Monetary Fund, "an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It also offers financial and technical assistance to its members, making it an international lender of last resort" (See Wikipedia) 
a financial rescue package - money to help a company or country when it has a financial problem (usually with conditions attached)
whopping - very big
a whopping $25.1 billion
disbursed - pay out money for a special purpose from a fund
disbursed over 17 months

threw in an extra - give something extra (usually for free)
threw in an extra $8.1 billion
an emerging market economy - a better way to say advanced developing economy (See Wikipedia)

exposure to risk Y - to be operating with the possibility that bad event Y could occur and cause you harm
Bank for International Settlements (BIS) - an international organization of central banks which fosters international monetary and financial cooperation and serves as a bank for central banks (See Wikipedia)
credit default risk - the possibility that a borrower may not pay back a loan

a debacle - an event or attempt that completely fails
Alt-A, Alt-A mortgage, Alternative A-paper - a type of U.S. mortgage that is considered riskier than A-paper, or "prime", and less risky than "subprime," the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans.
the Alt-A debacle (See Wikipedia)
the demise of Y - the end or death of Y 

left them nursing likely losses - they lost money (like after an injury or disease you have to "nurse" yourself backto health)
staid - old-fashioned, serious, and dull 
a staid old lady

Rakesh Saxena - an Indian financier and trader in the derivatives marketplace, as of June 2008 he is still engaged in a lengthy fight to avoid extradition to Thailand from Canada, he is accused of embezzlement in 1994-1995 (See Wikipedia and seeking Alpha biography)

default - when a borrower fails to pay borrowed money on time
credit default insurance - insurance to protect against a loan not being repaid
a credit default swap (CDS) - basically credit default insurance, "a credit derivative contract between two counterparties, whereby the buyer makes periodic payments to the seller in exchange for the right to a payoff if there is a default or credit event in respect of a third party or reference entity" (See Wikipedia)
an IMF lifeline - emergency money given by the IMF (to "save the life" of the country)
sovereign debt - money borrowed by the government of a country
fluctuate wildly - when a values rapidly jumps up and down by large amounts  

waits with bated breath - wait nervously to find out what will happen
a credit default swap index - a credit derivative used to hedge credit risk or to take a position on a set of credit entities (whole industries, countries, sets of countries, etc) (See Wikipedia)
CDX emerging market credit default swap index - a credit default swap index for debt in emerging market economies

basis points - 0.01, so a 20 basis points are 0.20, 100 basis points are 1.00,
used to express changes in percentages that can otherwise be confusing (See Wikipedia)
1,100 basis points - 11%
are well within the realm of reality in forthcoming days - may soon happen

a spread - the difference between two rates, interest rates or prices
index spreads widen - here supposedly the difference between credit default indexes for different kinds of debt (that indicates that default risk is increasing for emerging market debt)
denominated in Swiss francs - the value is tied to the Swiss Franc (Switzerland's currency)
high public debt - the government has borrowed a lot of money

anemic - not strong
anemic growth - weak growth, very low growth, actual growth much lower than potential
risk-averse investors - investors who avoid risk, who don't want to take risks (they might lose their money)

a prospect - the possibility that something might happen (See glossary)
X raised the prospect that Y - X made one feel that Y might happen
emergency rapid-response procedures - things that can be done quickly in an emergency to solve a problem
a committment - a promise to do something in the future
a financial committment - a promise to pay money to someone in the future

draw funds under this facility - get money from thiis programme
a pittance - a small amount of money
countries with sound fiscal positions - countries that do not have spending deficits that are too large

a currency swap - exchanging a large amount of a currency and the interest payments on this currency for a period of time
swap lines with central banks - the central bank of a country is experiencing low demand for its currency (devaluation, depreciation, weak currency, low value) has an arrangement with the central bank of a country with a stronger currency (e.g. US dollar) to exchange its weak currency for the stronger currency for a period of time those strengthening its currency (See discussion)

Keynesian counter-cyclical policies - using government spending to increase economic activity and pull a country out of a recession
the spectre of a world-wide depression - the threat or possibility of a world-wide recession

 

Posted by Jon Fernquest at 01:59 PM | Permalink | Comments (0)