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And this only makes it worse:
By Balazs Penz and Zoltan Simon
Oct. 22- Hungary’s central bank raised its key interest rate in an emergency measure to shore up the country’s currency, after it fell to near a record against the euro.
The Magyar Nemzeti Bank in Budapest raised the two-week deposit rate today to 11.5 percent, the highest since July 2004, from 8.5 percent, it said in an e-mailed statement. The move came two days after the bank left rates unchanged at its regular meeting. The last emergency rate increase was in 2003.
Governments are net payers of interest, so raising rates adds to governments spending on interest and raises costs of doing business and costs of investments- all ‘inflationary biases’ that further weaken the currency.
And a weaker euro (just saw it at about 129) means unrealized dollar losses across the Eurozone grow as a percentage of (eurodenominated) capital, pushing the banking system and the national governments pledged to support it towards insolvency.
> On Wed, Oct 22, 2008 at 3:08 AM, wrote:
> I wonder whether this will prove a tipping point for the euro:
> The willingness of the ECB to “bail out” a country that is not
> yet member of the Eurozone is quite significant and signals the
> concerns that EMU members now have about the disruptive
> effects of a crisis in Hungary. Of course, they can do it now
> that the have the sub-underwriter of last resort in the Fed.
> Also, the ECB liquidity support, unlike IMF conditionality loans,
> does not come with any attached string. The additional issues
> that the ECB action has caused are however important: if 5
> billion is not enough if the financial pressures intensify would
> the ECB lend more? Will the ECB do similar swaps with other
> Emerging Europe economies that are likely candidates ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ in the
> next few year – for EMU membership? Also should Hungary now
> use this additional international liquidity to prevent a further
> depreciation of its currency or should it save this additional
> ammunition in case things get worse?