Nov. 7 (Bloomberg) -- The International Monetary Fund approved a 12.3 billion-euro ($15.7 billion) loan to Hungary to shore up an economy ravaged by the global financial crisis in exchange for the government's pledge to cut spending.

Available immediately will be $6.3 billion of the 17-month loan and the rest will be dispersed after quarterly reviews, the IMF said in a statement in Washington today. The loan is part of a 20 billion-euro package, with the European Union and the World Bank also providing funds. Hungary will use the first portion to recapitalize banks and help them refinance debt.

The country's assets were battered as foreign-currency borrowing by local companies and consumers, along with slower growth, a wider budget deficit and higher government debt than elsewhere in eastern Europe, raised concern that the country may have difficulties in attracting capital.

``Hungary was hard hit by the global de-leveraging,'' the IMF said in the statement. It was ``among the first emerging market countries to suffer from the fallout of the current global financial crisis'' because of ``high'' levels of debt.

The forint traded at 261.77 per euro at 9:01 a.m. in Budapest, from 262.37 late yesterday.

Ukraine and Iceland have received IMF financing, while Pakistan and Belarus also asked for loans. Hungary's is the biggest rescue package so far, including funds from the EU and the World Bank. In exchange, the IMF is asking Hungary to cap spending, limit the growth of state debt and curb inflation.

`Recession Reality'

The effects of the global crisis are forcing Hungary to prepare for what Prime Minister Ferenc Gyurcsany termed a ``recession reality.'' The Cabinet is cutting spending and now expects the economy to contract by 1 percent next year, for the first time since 1993. Growth probably won't reach Hungary's estimated potential of 3 percent until 2011, the IMF said.

Hungary has postponed tax cuts planned for next year to focus on cutting the budget deficit and reduce reliance on external financing. The government projects the shortfall at 3.4 percent of gross domestic product this year and 2.6 percent next year. Earlier estimates were 3.8 percent and 3.2 percent.

The forint fell to a record against the euro on Oct. 23, a plunge of 22 percent in three months to that point, while the benchmark BUX stock index fell 28 percent in October. OTP Bank Nyrt., the nation's largest lender, plummeted 51 percent since the end of September, wiping 876 billion forint ($4.3 billion) off its value.

Bailout Plan

The government yesterday proposed a 600 billion-forint ($3 billion) aid package to shore up the banking system. The plan will be evenly split between recapitalizing banks in exchange for non-voting priority shares and refinancing guarantees, Magyar Nemzeti Bank President Andras Simor said today.

``The package is available to private Hungarian banks of systemic importance,'' Simor and Finance Minister Janos Veres said in a letter of intent to the IMF, distributed at a press conference in Budapest. It aims to ``buttress their credibility and confirm our commitment to preserving their key role in the Hungarian economy.''

OTP, Intesa Sanpaolo SpA's CIB Bank Zrt. and Bayerische Landesbank's MKB Bank Zrt. are the three banks that qualify for the plan, Veres said in parliament yesterday, according to state-run news wire MTI. Intesa's Hungarian unit ``hasn't asked and doesn't intend to'' apply for the aid, HVG.hu reported, citing Gyorgy Suranyi, chairman of the local subsidiary.

`Stabilizing Force'

The government's bailout package can be a ``serious stabilizing force'' for the banking system, helping to ``strengthen confidence,'' OTP said in an e-mailed statement.

The Budapest-based lender said its capital position is ``stable,'' profitability is ``high,'' asset quality is ``good'' and liquidity is ``manageable.'' The bank's management plans to review the plan's details once the necessary legislation is passed and will later recommend to shareholders whether to participate in the program.

A looming recession, the first since 1993, hurts the outlook for Hungary's banks, Moody's Investors Service said on Nov. 4. The economic decline will lead to falling lending and worsening credit portfolios, while banks will face higher funding costs, the credit ratings company said.

``We continue to view the outlook for the direction of fundamental credit conditions in the banking system for the next 12 to 18 months as negative,'' said Gabriel Kadasi, a London-based Moody's analyst.

The loan is designed to ``facilitate the rapid reduction of financial market stress in Hungary, while supporting the country's longer-run economic goals,'' the Washington-based lender said.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Christopher Swann in Washington at Cswann1@bloomberg.net

Last Updated: November 7, 2008 03:02 EST