Hungary - Financial Sector and Macro Stability Loan (DPL)

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The objectives of the Financial Sector and Macro Stability Policy Loan Program for Hungary are fourfold and include: (a) support to fiscal reforms designed to ensure long-run fiscal and macroeconomic sustainability and restore investor confidence, improving access of the government, banks and the corporate sector to external funding; (b) support to the financial stability program, designed to ensure adequate levels of liquidity and healthy capital cushions, able to absorb the effects of the international crisis and the contraction of economic activity; (c) support to pension reforms designed to preserve adequate benefits while tightening eligibility criteria and containing expenditures to improve the sustainability of the pension system; and (d) cost containment and deficit prevention in the health sector while ensuring access to care. Hungary was one of the first emerging economies affected by the financial crisis. In the past two years (2007 and 2008) the government made an impressive effort to address the serious fiscal and macroeconomic imbalances generated in the first half of the decade and restore investor confidence. However, the crisis reduced overall risk tolerance, and Hungary was still perceived as a high risk country due to the large deficits and liabilities that had been accumulated in the first half of the decade. Hungary eventually lost access to foreign exchange (FX) funding in the second half of 2008 and was forced to request a €5 billion repurchase-based (repo) facility from the European Central Bank (ECB) for short term FX funds.