The ECB is now in a position of beginning to interfere in the finances of countries that are not in the eurozone and, as things go, may not be there for some time. No, I don't mean Britain, though it is not to be excluded that there will be strong murmurs that the answer to whatever question the financial crisis has posed (and nobody who is working in that world knows the question, let alone the answer) is for this country to join EMU and adopt the euro. After all, it has been such a success in the countries that did just that.
The country the ECB is extending its sway over, admittedly, as requested by its central bank, is Hungary. The best summary of what happened was, as ever, in the Wall Street Journal Europe but sadly, one has to subscribe to be able to read the articles on the net. (You can get the editorials, columns and the summary of what is on the net for free, though.)
The ECB said it will lend the National Bank of Hungary up €5 billion ($6.75 billion, £3.89 billion), enabling Hungarian authorities to funnel euros to their cash-strapped commercial banks. the move marks the first time the ECB, which makes monetary policy for the 15 nations that share the euro currency, has stepped in publicly to lend to a country outside the euro-currency zone.The Financial Times has the story as well. The loan did not solve the general economic problems as this article reports.
The ECB's extraordinary action highlights growing conern among economists and investors that the euro zone would also suffer, should Hungary's economy founder. Some 80% of the assets in Hungary's banking sector are foreign-owned, according to research firm Capital Economics. Austria - a euro-zone nation - is a major presence across Central Europe.
Hungary has been hit hard by market turmoil in recent days, as its heavy reliance on foreign borrowing made it a prime target for investors pulling out of risky bets. Its currency, the forint, fell to a two-year low against the euro this past Friday, and the government has struggled in recent days to find buyers for its bonds and shorter-term Treasury bills. Earlier this week, government officials put in a request for potential help from the International Monetary Fund, though they maintain an IMF loan is a last resort.
The ECB's emergency loan, in combination with a package of government promises that included trimming the budget deficit to 2.9% of gross domestic product next year, cheered investors. The forint strengthened against the euro in reaction to the announcement.
Hungary cut its economic growth forecast for 2009 to 1.2% on Friday from an earlier 3% forecast, against a background of tightening credit at home and a downturn in its main export market, the euro currency area. The worsening outlook and pressure from international financial markets has forced Hungary to draw up a new, tighter budget for 2009, which the government was due to present to parliament on Saturday.AFP reports a somewhat panicky "national summit" in Hungary where everybody made obvious comments without producing any specific ideas, at least not in public. Perhaps, we shall have to wait for a secret recording to be made public. It has happened before, when we found out that the Prime Minister Ferenc Gyurcsány told a political meeting of close colleagues that he and his supporters had "lied morning, noon and night" to the electorate during the previous election campaign.