Hungary asks EU and IMF for 'precautionary' help of €20bn

Hungary is to ask the International Monetary Fund and the European Union for a "precautionary" two-year financial rescue package worth between €10bn and €20bn, proving that even the earliest victims of the credit crunch remain in intensive care.

The economy minister, Gyorgy Matolcsy, said that his government would negotiate a fresh credit line from the IMF and the EU in case the financial situation in Europe deteriorates.

Investors were encouraged by the rollover of European Central Bank funding to leading eurozone banks this week, but the publication of vital "stress tests" on 100 key financial institutions on 15 July will be an important moment in the quest to restore confidence.

"Our intention is that we extend the existing IMF/EU deal until the end of the year and from the beginning of next year we continue with a two-year precautionary agreement but in a way that we signal that this is a different deal, not urgency," Mr Matolcsy said.

He added that Hungary was preparing to run a larger budget deficit than the 3 per cent of GDP previously agreed with the IMF in 2011-12. Hungarian national debt is running at 80 per cent of GDP, high even by European standards.

Hungary was one of the first nations to approach the IMF for assistance, agreeing a €20bn (€16.5) rescue package last October, after foreign finance fled from the country in the financial panic. Although not a member of the eurozone, renewed fears last month that Hungary might default on its debts added to the febrile atmosphere affecting money markets across the Continent. Comments from a government spokesman about "skeletons in closets" were later rescinded.

Much of Hungary's debts are denominated in Swiss francs, which has proved to be a fast appreciating currency during recent volatility.

The Hungarian government will create an asset management company, in effect a "bad bank", to help borrowers who are defaulting on their loans due to sharp gains by the Swiss franc. Mr Matolcsy said: "If we want to squeeze this animal into a zoo cage, then it is a bad bank, but a special kind, as it is not a bank."