Nov. 3 (Bloomberg) -- Concerns that Hungary may have difficulties financing its foreign loans are exaggerated because a large portion of the debt is owed by local lenders to their foreign parents, the head of the bank association said.

``This is a massively overstated worry,'' Peter Felcsuti, head of the Hungarian Banking Association and chief executive of the Budapest-based Raiffeisen International Bank AG unit, said in a phone interview today. ``What does the fact that a bank owes its parent have to do with Hungary's finances?''

The government last week secured a 20 billion-euro ($25.7 billion) standby loan from the International Monetary Fund, the European Union and the World Bank after its stocks, bonds and currency fell as investors shun riskier emerging-market assets in a flight to safety.

Iceland and Ukraine also received IMF loans, while Belarus and Pakistan have applied for aid. Bulgaria and Romania are discussing policy proposals with the Washington-based lender. The EU last week proposed more than doubling the limit on loans aid to its distressed member state outside the euro region.

In Hungary, investors and economists cited the country's reliance on foreign-currency loans, its wider budget and current- account deficits, higher state debt and slower growth than elsewhere in the region for market difficulties as the currency fell to a record.

The budget deficit was 5 percent of gross domestic product last year, while government debt reached 66 percent of GDP, according to Eurostat in Luxembourg. In the Czech Republic, the ratio is under 30 percent.

Bank Debt

Of Hungary's 25 billion euros of external debt expiring within a year, about 15.5 billion euros are owed by the banking industry, according to a study by Marton Tardos of OTP Bank Nyrt., the country's only lender without a foreign owner. The 5 billion euros owed by the government compare with the central bank's 17 billion euros of foreign reserves.

``The central bank's reserves on their own would ensure the financing of expiring and renewed debt,'' Tardos wrote in his study, distributed on Oct. 28. ``Whether it's sufficient will be decided in investor's heads as a strong speculative attack could lead to self-generating expectations.''

It's unlikely ``if not downright impossible'' that foreign banks would stop financing their Hungarian units, Felcsuti said. UniCredit SpA, Intesa Sanpaolo SpA, Erste Bank AG and Bayerische Landesbank are among the owners of the country's largest lenders.

Restore Confidence

Hungary's IMF-led aid package, along with a 5 billion-euro loan facility from the European Central Bank, the government's decision to cut the budget deficit faster than originally planned and an emergency 3 percentage-point interest rate increase to 11.5 percent, the European Union's highest, should help restore confidence in the country's markets, Felcsuti said.

The forint fell to a record on Oct. 23, while the benchmark BUX stock index lost 28 percent of its value in the past month. The government was forced to revise its growth projection twice in a month and now expects the economy to contract next year for the first time since 1993.

The debt management agency scrapped several bond auctions because of a lack of demand, forcing the government to cancel remaining offerings for this year. Prime Minister Ferenc Gyurcsany also pledged to meet euro-adoption terms next year, cutting the budget gap to 2.6 percent of GDP.

Since the size of the IMF agreement was announced, the forint has gained 10 percent from its record low against the euro and the BUX surged 17.7 percent. On Oct. 30, the government was able to sell the full amount of debt offered at a Treasury bill auction for the first time since Sept. 25.

To contact the reporter on this story: Balazs Penz in Budapest at bpenz@bloomberg.net.

Last Updated: November 3, 2008 10:53 EST