* EU, IMF, World Bank join forces in $25.1 bln bailout
* Analysts say deal shows concern for Central Europe region
* Forint gains 2.5 pct, Budapest stocks up 11.4 pct
* Austrian banks pledge to keep lending, investing.
(Adds IMF, central bank comments, debt agency)
By Balazs Koranyi and Gergely Szakacs
BUDAPEST, Oct 29 (Reuters) - A $25.1 billion bailout of
Hungary by the IMF and European Union settled nerves in the
bloc's ex-communist countries on Wednesday, though the regional
fallout of the financial crisis looked to have some way to run.
The larger-than-expected rescue, the biggest for an emerging
market economy since the global crisis began, dwarfed the $2
billion and $16.5 billion sums offered earlier to fellow
strugglers Iceland and Ukraine.
The amount was twice as much as markets had anticipated and
mostly covered analysts' estimates of Budapest's financing needs
over the next year. The IMF said the size of the deal was meant
to send a signal to calm plummeting markets.
"We felt that the size of the package should be such that
markets should be reassured that there's sufficient volume
behind it," IMF Senior Advisor Anne-Marie Gulde told a news
conference.
Its immediate impact on Wednesday was to boost the forint
currency and stock exchange -- welcome relief after weeks of
panic selling that had hammered the forint lower by almost 20
percent and caused the bond market to freeze up.
The unit jumped more than 2.5 percent versus the euro in
early trade and the Polish zloty and Czech crown also gained.
Shares on the Budapest bourse <>jumped 12 percent, led by
OTP Bank <OTPB.BU> and oil group MOL <MOLB.BU>.
In contrast in Ukraine, who has tapped the IMF but remains
outside of the EU, saw its hryvnia currency plummet to an
all-time low, at one point losing 14 percent on the day.
CRISIS MANAGEMENT
The financial crisis has come as a shock to most countries
in central and eastern Europe, a region of states ranging from
those still struggling with fundamental economic problems to
those fully integrated in the European Union and euro zone.
Countries across the region have slashed growth forecasts
and analysts have expressed worries over economies in the
Baltics and Balkans, which were headed for at best bumpy
landings even before the latest round of financial turmoil.
Economists welcomed Hungary's rescue package but said it
also underscored that the financial crisis was far from over.
"This clearly illustrates that the financial crisis is
significantly greater in Central and Eastern Europe than most
market participants have been willing to accept until now,"
Danske Bank Chief Analyst Lars Christensen said.
"The fact the EU is so directly involved indicates that the
EU (and the ECB) is afraid that if Hungary were allowed to
implode, then the crisis could rapidly spread to the other CEE
countries."
The deal will force Hungary to make painful budget cuts
after two years of austerity and may worsen the outlook for an
economy heading for recession.
Hungary's government said on Tuesday the economy could
contract by up to 1 percent next year -- the first recession
since the fall of communism -- although the effects of budget
cuts to accompany the deal were still not clear.
Foreign banks KBC <KBC.BR>, Raiffeisen International
<RIBH.VI>, Erste Group Bank <ERST.VI> and UniCredit's <CRDI.MI>
Bank Austria -- which own Hungarian units that are the country's
key lenders -- all said their local units would continue lending
forints and, where appropriate, euros to Hungarian clients.
CLOSER TO EURO ADOPTION?
The IMF said it had agreed to offer Hungary a $15.7 billion
(12.5 billion euros) loan programme, while the EU stood ready
with an additional $8.1 billion in financing and the World Bank
another $1.3 billion. The loans, with maturity between 3 and 5
years will bear a fixed interest of 5 to 6 percent.
The crisis will put back Hungary's drive to catch up with
Western Europe but analysts said the IMF help may actually push
the country -- long regarded as the region's sick man -- closer
to membership of the euro zone in the longer run.
"This will stigmatize Hungary for quite a while," Citigroup
economist Eszter Gargyan said. "But Hungary has become detached
from its (central European) peers quite a while ago and it's not
IMF help that has sullied our reputation."
Investors had feared Hungary's heavy dependence on borrowing
from abroad -- 90 percent of mortgages this year were in Swiss
franc loans -- meant the country could struggle to continue to
find financing from foreign sources to fuel its economy.
To encourage investors to keep cash in the country, the
central bank raised interest rates last week by 3 percentage
points to 11.5 percent, but even that measure failed to
kick-start the bond market.
"I believe that the interest rate hike was the right step
... it made speculating against the forint much more expensive,"
Central Bank Governor Andras Simor said. he said the bank needed
a month or two to review policy and adjust to the situation.
(Editing by Michael Winfrey, Patrick Graham and Victoria Main)
