BUDAPEST has been transformed over the past decade from a down-at-heel haven of post-Communist nostalgia to a lively and prosperous metropolis on the Danube, with smart restaurants and stylish urban apartments.

Yet Hungary last week became the latest country forced to take a $25bn rescue package from international donors, as it was driven to the brink of bankruptcy by the credit crunch.

Little more than a year ago, City investment banks were holding glitzy seminars extolling the virtues of emerging Europe as a one-way bet on the benefits of catch-up capitalism, and cash was flooding into the region. Now, the former darlings of the international markets are lining up for handouts.

Hungary`s rescue has been the largest, but it is not alone. Iceland has already received help; Ukraine and Belarus are in negotiations with the IMF; and, in another extraordinary move, the US Federal Reserve last week offered to provide dollars in exchange for local currency to cash-strapped central banks in South Korea, Mexico, Brazil and Singapore.

The speed at which these various financial lifeboats have been launched reveals a deep international fear that the jarring shock suffered by investors around the world will force them to bail out of all but the safest markets, draining credit from vulnerable countries.

That could even mean the aftershocks of the financial crisis are felt as far away as Africa - and as the IMF rides to the rescue in central Europe, anti-poverty campaigners are becoming increasingly alarmed that the fate of the world`s poor will be forgotten in the maelstrom.

Ngozi Okonjo-Iweala, the former Nigerian finance minister who is now managing director of the World Bank, warns that the progress many African countries have made over the past decade could be at risk. `We are worried that the financial crisis will compound other crises food, fuel, fertiliser. These are hitting poor countries, and hitting Africa particularly hard,` she says.

For the time being, though, the focus is on eastern Europe - and the size of the bailout to Hungary has put the IMF firmly back in business. After several years of rare calm in the world economy, it has found its role once again.

Controversy is already raging about the conditions countries have been forced to meet to unlock IMF cash. The fund faced fierce criticism after the Asian financial crisis of the late nineties for imposing political straitjackets on the countries it helped.

Iceland has had to shove its interest rates up to 18 per cent, having cut them as recently as a fortnight ago. That should help to underpin its currency, the krona, whose plunge has made the country`s vast foreign debts harder to afford. But, in the short term, it will exacerbate borrowers` difficulties.

In Belarus, meanwhile, the government is reportedly under pressure to privatise its banking sector precisely the opposite course of action taken by the US and Britain, where billions of dollars of public cash have been spent nationalising all or part of many battered banks.

In Hungary, drastic budget cuts are part of the IMF package. Romania is rumoured to have turned down IMF help because the government was unwilling to sign up to sharp reductions in public spending.

However, Barbara Nestor, eastern European economist at Commerzbank, says Bucharest is unlikely to be able to hold out for long, because if Romania is the only country in the region without an aid package, it will be singled out by investors. `Market pressure could eventually lead it to co-operate,` she says.

Neil Shearing, central Europe economist at consultancy Capital Economics, predicts that the spending reductions demanded by the IMF will bring about a painful downturn. `We now expect most of the region to enter recession this year,` he says. `We expect further IMF packages, and they come with strings attached they only lend to you if they think they`re going to get the money back, and that means cutting government spending by as much as 1 per cent of GDP.`

So while the US and Britain are slashing interest rates, and allowing public spending to rise to prevent the recession from becoming too severe, emerging economies will be urged to push up borrowing costs and cut back on government budgets, to demonstrate to the world`s financial markets that they have learnt the error of their ways.

Laszlo Andor, Hungarian director of the European Bank of Reconstruction and Development, says ironically, the downturn now in store could help Budapest meet the strict targets for joining the European single currency.n

— The Guardian, London