Investors are demanding more than triple the yield they sought a year ago to own Hungarian bonds denominated in foreign currencies.

TO BE NOTED: From Bloomberg:

"IMF Lending Exceeding $55 Billion Prompts Bondholders’ Anxiety

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By Simon Kennedy and Sandrine Rastello

April 20 (Bloomberg) -- The International Monetary Fund may be so conscious of having handed out bad advice to needy countries in the past that it isn’t offering them enough guidance now.

The Washington-based lender is combating the worst financial turmoil in its 64-year history with more than $55 billion in loans for nations from Pakistan to Serbia. As the fund prepares to lend even more, it is retreating from its practice -- carried out with adverse effects a decade ago in Asia -- of demanding that governments overhaul their economic systems in return for aid.

The risk is that without more-stringent loan requirements, borrowers won’t reform their foundering economies, leaving investors to enforce the discipline -- and delay recovery -- by shunning the nations’ debt and currencies. Among the economies whose markets may be most vulnerable are those in eastern Europe such as Latvia and Hungary, say Brown Brothers Harriman & Co. and Royal Bank of Scotland Group Plc.

“The pendulum may be swinging too far,” says Claudio Loser, former head of the fund’s Western Hemisphere department and now a fellow at the Inter-American Dialogue in Washington. “There was a strong perception that the IMF used to ask too much of countries. Now there is a major danger it’s moved too far in the direction of not setting enough conditions.”

$750 Billion

Little more than a year ago, the IMF -- which convenes its spring meeting in Washington April 25 -- lacked both relevance and resources. Now its lending firepower is being tripled to $750 billion by the Group of 20 nations. The G-20 also agreed to give the IMF another $250 billion in Special Drawing Rights, an overdraft facility for its 185 members.

“The IMF needs to adapt,” Dominique Strauss-Kahn, the fund’s managing director, said in an April 16 speech. “Its lending must become more flexible and better tailored to country circumstances.”

The fund said last month it would set fewer goals for nations to commit to in return for aid and would place less emphasis on structural reforms such as overhauling banking or tax systems. It also eased terms for a credit line introduced in October that is now attracting interest from Mexico and Poland.

“There’s lots of money but little pressure for economies to adjust,” says Kenneth Rogoff, former IMF chief economist and now a professor at Harvard University in Cambridge, Massachusetts. “It’s much more fun being Santa Claus than Scrooge.”

Market Rally

So far, aid packages from the IMF have buoyed markets in some emerging economies. Mexico’s peso strengthened 8 percent against the U.S. currency, and Poland’s zloty appreciated 1.1 percent versus the euro since the countries said they will seek IMF credit lines.

Ukraine’s equities and bonds have rallied since the IMF announced its $16.4 billion bailout in October, with the benchmark PFTS stock index gaining 47 percent, and the nation’s 7.65 percent U.S. dollar bonds due 2013 climbing 35 percent.

If governments don’t improve their fiscal policies, though, investors will deprive their economies of capital and punish their bonds, stocks and currencies, says Win Thin, senior currency strategist at Brown Brothers Harriman in New York.

“We cannot see investors piling back into the emerging- market countries with the worst fundamentals, even if the global crisis continues to abate,” Thin says.

Triple the Yield

Investors are demanding more than triple the yield they sought a year ago to own Hungarian bonds denominated in foreign currencies. Pension funds may pull out of Latvia after Fitch Ratings on April 8 downgraded its debt to junk, says Karlis Danevics, head of the Latvian credit department of Stockholm- based bank SEB AB.

Fitch said about half the countries in central and eastern Europe may face credit-rating downgrades. The ability of governments to stick with their IMF commitments will help determine the ratings, Fitch said.

Thin says ratings companies may still be too confident in the sovereign debt of Latvia, Hungary and Romania. ING Romania analysts say the country may exceed the budget-deficit target of 4.6 percent of gross domestic product that its government agreed on with the IMF.

“IMF money helps resolve issues to do with liquidity, but is only one part of the process of overhauling economies with more fundamental problems, for example Latvia, Ukraine and Hungary,” says Timothy Ash, head of emerging-market economics at Royal Bank of Scotland.

Missing Opportunity

Economists from countries now receiving aid say the fund is missing an opportunity to force lasting reforms.

Zoltan Torok of Raiffeisen International Bank AG in Budapest says the IMF has been “very soft” on Hungary -- first calling for the budget deficit to be reduced to 2.6 percent of gross domestic product from 3.4 percent last year, then settling for about 3 percent.

He says the IMF didn’t go far enough in pushing for cutbacks to Hungary’s pension system. Almost a third of the population of 10 million is retired, and their benefits account for 10 percent of GDP, according to the Paris-based Organization for Economic Cooperation and Development.

In Serbia, Stojan Stamenkovic, head of the Belgrade-based Economic Institute, says the fund has suggested it “will accept any solution” from the government that cuts the 190 billion- dinar ($2.7 billion) budget deficit by 100 billion dinars. That’s not enough, given that Serbia’s economy is likely to contract 10 percent this year, he says.

Social Programs

Elsewhere, the fund has eased its embrace of free markets and aversion to big government while increasing its emphasis on social programs. For its $7.6 billion loan package, Pakistan was given the goal of tripling spending for the poor to 0.9 percent of GDP. Asad Farid, an economist at AKD Securities in Karachi, says the IMF lacks a “long-term policy” that would encourage Pakistan to cut its trade deficit and increase capital investment.

The biggest test for the IMF’s new strategy may come in Turkey, where aid talks collapsed in January. Economic Minister Mehmet Simsek said March 26, after the talks resumed, that he expected the fund to show more flexibility.

“It would be positive if the new approach means there’s a new perspective” on the size of the spending cuts the IMF will seek, he said.

Ukraine’s Deficit

The fund hasn’t completely rolled over. It delayed a second installment of financing for Ukraine after objecting to the government’s proposal to run a budget deficit of 5 percent of GDP, agreeing April 17 to accept a shortfall of 4 percent. It also postponed a 200 million-euro ($264 million) transfer to Latvia after the government failed to cut its deficit quickly enough. Iceland was ordered to lift its benchmark interest rate to a record 18 percent.

Such demands prove to Kevin Daly, who helps oversee about $4 billion in emerging-markets bonds at Aberdeen Asset Management Plc in London, that the IMF is “striking the right balance” between support and restraint.

“There’s a realization that there is still some discipline from the IMF and that countries will have to address its measures,” Daly says.

Still, the fund’s shift signals recognition that it went too far in the 1990s demanding free-market policies that often deepened crises and alienated it from nations it sought to help.

Sweeping Cuts

In 1997 the IMF pushed sweeping spending cuts and interest- rate increases on Thailand in return for a $3.9 billion loan. Within six months, the fund conceded it had been too aggressive as Thailand’s growth and tax revenue plunged. Riots flared in Indonesia when the government carried out the IMF’s call to eliminate fuel and food subsidies for the poor.

“The good news is that they’ve committed themselves not to have the structural conditionality that was part of the rigidity, part of the problem in the East Asia crisis,” Nobel Prize-winning economist Joseph Stiglitz said in an April 16 interview.

For some countries that need aid, such as Mexico and Poland, “we won’t ask them for anything to change, because they have the right policies and it’s absolutely not their fault that they’re in a difficult situation,” Strauss-Kahn, 59, said in response to a question after his April 16 speech.

In other cases, such as aid to Romania, he said he asked his team not “to fix the world, fix all the problems” as sometimes they wanted to do in the past “but just to fix the problems they’re facing.”

Jonathan Anderson, an economist at UBS AG in Hong Kong, says that even if the IMF has relaxed its conditions for assistance, that’s no reason for governments to delay paring debts and fiscal imbalances.

“If depositors in Latvia, Lithuania, Ukraine or other cases wake up one morning and decide they all want to get out of the currency at once, it probably doesn’t matter how big the IMF package is,” Anderson says. “There are still potential blowup scenarios out there.”

To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net; Simon Kennedy in Paris at skennedy4@bloomberg.net"

"I don't think that we'll be able to help everybody,"

From the UNHCR:

Miljo Miljic and his family left their hometown of Tuzla with almost nothing. © UNHCR/M.Jankovic

UNHCR News Stories

Protracted Refugee Situation: The continuing struggle of Europe's forgotten refugees ( FORGOTTEN PEOPLE. THE RESULT OF ANOTHER ETHNIC CONFLICT. THEY WILL EVENTUALLY HAVE TO BECOME SERBIANS. )

RIPANJ, Serbia, January 12 (UNHCR) – Miljo Miljic and his family live in a spartan apartment in the Serbian village of Ripanj. There are no family photos, no paintings, no book collection, no heirlooms – no possessions recalling their former lives in their hometown of Tuzla in Bosnia and Herzegovina.

"We didn't take anything with us because we didn't have time. We had to run for our lives. The only thing that comes to mind in such a situation is to save your children and your own life," says Miljo. "You don't think about the photographs, you don't think about personal documents, clothes, whatever."

Miljo, his wife Milica, son Milutin and daughter Stanislava are refugees, forced to flee Tuzla in 1992. All they have as proof of their past and their identity is a refugee card. Their belongings were left behind as Miljo and his wife, clutching their then infant children, rushed to escape.

More than half-a-million civilians fled to Serbia from Bosnia and Herzegovina and from Croatia in the 1990s conflicts. Considerable success has been achieved on local integration, with over 200,000 former refugees now holding Serbian citizenship. But some 96,000 refugees remain – the remnants of Europe's largest protracted refugee situation. Many live in desperate conditions and face a bleak future.

The experience of the Miljic family is quite common. On arrival in Serbia, they were accommodated with 350 other refugees in the Suplja Stena Collective Centre just south of the Serbian capital, Belgrade. It was effectively a refugee camp where they slept in a single room with 27 other people and shared the bathroom, lavatory and kitchen.

Milica says this was the worst period of her life. "It was horrible when we arrived at the collective centre. I thought I'd kill myself, but then we had to look after these two small children," she recalls. Things got a little bit better when the family were given their own room.

They stayed in Suplja Stena until 2003, when the collective centre was privatized and sold. Although the centre was only meant to be a temporary solution for Serbia's refugees, it was still a shock for the Miljic's to be cast out into the street and forced to fend for themselves.

In nearby Ripanj, they found someone willing to rent two rooms and a bathroom. They have been there ever since, but life is still a struggle. "We live from what we earn day-by-day; we never know when the next job will come. It's very difficult to take care of two children and to put them through school," says Miljo. Life is easier in the summer when they find work cleaning holiday homes and gardening, but in the winter it is really difficult to make ends meet.

Miljo and Milica thought about going back to Tuzla, but their old home had been trashed and looted and they did not feel safe. They considered selling the property, but they would never make enough from the sale to build a new place. What's more, their children had grown used to Serbia. So repatriation is not an option; nor is resettlement.

That leaves local integration. But taking Serbian nationality will not guarantee them employment or a new house, while the cash-strapped government cannot afford to give too much under its social welfare programmes. So they are holding onto their refugee cards, which entitle them to basic medical care and occasional humanitarian assistance from UNHCR and its partners.

But Miljo and Milica are aware that one day their refugee status will be revoked because they are no longer deemed to be in danger and the root causes of the Balkan refugee problem have almost ceased to exist. That won't end the problem of finding employment and paying for food, rent and medical bills at a time when they will be near retirement age.

At least they have managed, despite the difficulties, to provide their children with a decent education. This has been their investment in the future. Milutin is still in high school, but Stanislava, who has applied for Serbian citizenship, is doing an internship in a Belgrade hospital after finishing nursing school.

The parents are pinning their hopes on Stanislava finding a decent job, even though unemployment is high in Serbia and the economic outlook is grim. "We only want for our children to complete their schooling, find employment and be better off than we are. I don't think about us anymore," says Miljo.

UNHCR helps where it can, but the refugee agency also has limited resources and the situation is unlikely to improve during the current recession. "I don't think that we'll be able to help everybody," says Lennart Kotsalainen, UNHCR's representative in Serbia, while adding that the government and the international community should at least help the most vulnerable.

The UN refugee agency has recently put renewed stress on finding solutions to protracted refugee situations, which account for some 6 million people worldwide who have been in exile for at least five years – many of them for decades. High Commissioner for Refugees António Guterres said last month that political will was a main precondition for finding durable solutions.

He said each protracted situation was unique and solutions must be comprehensive, using a combination of approaches that can include repatriation, local integration, and resettlement to a third country. For Serbians such as the Milic family, a real and lasting solution still seems remote.

By Andrej Mahecic
In Ripanj, Serbia"