Tuesday, October 28, 2008

Hungary following the way of Iceland

Not to be continually negative about what is going in in the world, but today the International Monetary Fund (IMF) announced what has been coming together over the last week or so. The IMF, European Union and the World Bank have put togother a $25.1 billion bailout package for Hungary. We've seen our markets here in the United States go down, up and down (today up 889.35 to 9,065.12). Sure, I like to complain about the battering my accounts have taken, just like everyone else. As bad as we've seen our markets, though, emerging economies are really having a tough time riding the storm of these markets. Hungary is not alone. The IMF also has tentative agreements with Iceland and Ukraine. And, the IMF is in discussions with other countries as well. The IMF typically imposes restrictions on monies it loans, which for Hungary may include health care and local government support limitations.

Much of the word out of the IMF sounds familiar. We must restore investor confidence in the financial markets. Without that, the economies struggle, both here in the United States and in countries like Hungary. There is also a similar vein in the actions underway across Europe to make sure that the banking systems are stable. So, our market ups and downs have an even greater impact abroad. Thankfully, in the end, it seems like world leaders have realized the inter-twined nature of the economies and are attempting quick action.

Hungary's bailout is $25.1 billion. Sure, we are talking about an entire country needing a bailout. Just the thought of country bailouts is imposing. This amount, though, pales by comparison to the $122.8 billion the Treasury has extended to AIG alone (see Explaining the Financial Crisis to Students). Keeping focus on the financial magnitude of government intervention, AIG is receiving close to five times what the whole country of Hungary will receive. To borrow a concept recently used by Jim Chen over at Moneylaw to refer to a greater magnitude of financial measurement, we might say "Now that's a lot of Smoots!" Of course, we might wonder if $25.1 billion will be enough for Hungary (or, whether AIG will stop at $122.8 billion).

Dominique Strauss-Khan, Managing Director of the IMF, spoke recently about the need of the IMF to be in a position to act quickly to respond to financial crises in emerging markets. It seems that the IMF's proactive stance was a wise route. One can hope that these early interventions by the IMF will help ease the ride of this financial crisis in developing countries. Time will tell in the end, just how much intervention will be needed in developing economies.


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