Nov. 6 (Bloomberg) -- Hungary proposed a 600 billion- forint ($3 billion) aid package to shore up its banking system, which was hit by the global financial crisis.

The plan, part of a 20 billion-euro ($25.8 billion) rescue package from the International Monetary Fund, the European Union and the World Bank, 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.

Hungary turned to the IMF for help after its markets were ravaged by the global financial crisis as investors shunned emerging-market assets in a flight to safety. The first part of the agreement with the Washington-based lender is to shore up the banking system.

``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 Bank Nyrt., 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 today, according to state-run news wire MTI.

The forint weakened as much as 1 percent and was down 0.5 percent at 261.36 per euro by 3:05 p.m. The benchmark BUX stock index plunged 8.8 percent to 13,138.64.

Moody's Outlook

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.

Hungary doesn't intend to help lenders owned by foreign parents that took part in other government bailout plans, Simor said. The U.K., Belgium, Austria and Germany were among European countries that offered aid to banks.

`What Lies Ahead'

``This is to prepare for a worst-case scenario,'' said Jiri Stanik, a Prague-based banking analyst at Wood & Co. ``OTP has been saying it's well-capitalized and that's probably true at the moment. But the problem is what may lie ahead.''

Losses on its bond portfolio, the rising cost of foreign- currency financing and deteriorating asset quality may hurt OTP in the future, according to Stanik.

OTP is in an ``excellent'' state and has all the tools it needs to survive the crisis, Chief Financial Officer Laszlo Urban said on Oct. 8. Its Tier 1 capital ratio, the reserve kept to protect depositors against potential losses, is at 11.2 percent and the bank has no exposure to ``toxic'' assets.

Morgan Stanley yesterday cut its recommendation for OTP stock to ``underweight'' from ``equal weight,'' slashing its price estimate by 63 percent to 2,600 forint, citing a worsening outlook for the lender's finances. OTP wasn't immediately available to comment today.

The government, which will pay market prices for any bank shares, plans to hold the stakes it may receive temporarily, Veres said. Hungary is seeking priority shares, he added.

``We aren't planning for government ownership to appear in Hungarian banks for the long term,'' Veres said.

IMF Role

Emerging economies are turning to the IMF as investors, stung by losses in developed countries caused by the global financial crisis, sell riskier developing-market stocks, bonds and currencies. Ukraine and Iceland have received IMF financing, while Pakistan and Belarus have also asked for loans, though Hungary's is the biggest rescue package so far, including the financing from the EU and the World Bank.

Hungarian 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 east Europe, raised concern that the country may have difficulties in securing funding.

`Recession Reality'

The effects of the global crisis is forcing Hungary to prepare for what Prime Minister Ferenc Gyurcsany termed a ``recession reality.'' The government is cutting spending and now expects the economy to contract by 1 percent next year, for the first time since 1993.

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 plummeted 51 percent since the end of September, wiping 876 billion forint ($4.3 billion) off its value.

Lenders with at least 200 billion forint in warranty capital can apply for recapitalization through Jan. 31, Simor said. The Capital Base Fund aims to raise the adequacy ratio of eligible banks to 14 percent.

The Guarantee Fund will be available through the end of next year to guarantee the rollover of loans and wholesale debt securities with an initial maturity of more than 3 months and up to 5 years.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net.

Last Updated: November 6, 2008 09:26 EST