IP/08/1612

Brussels, 31 October 2008

Commission proposes financial assistance to Hungary and an increase in overall BoP loans ceiling

The European Commission has formally proposed to grant financial assistance for Hungary's balance of payments (BoP). It has also proposed to raise the overall ceiling foreseen in the Regulation establishing a facility providing medium-term financial assistance to European Union countries' BoPs to €25 billion from €12 billion at present. Both proposals have been sent to Member States which are expected to endorse them at the finance ministers' meeting (ECOFIN) on 4 November. In the case of the amended ceiling, however, the European Parliament and the European Central Bank will need to give their opinions to the Council before the formal adoption. Despite considerable efforts since mid-2006 to correct its budgetary position and external imbalances, the Hungarian financial markets came under severe stress this month as the global financial crisis deepened and broadened. In view of this, the Hungarian government has now taken steps to accelerate the deficit reduction and to improve fiscal governance as part of a comprehensive economic programme to foster market confidence.

"I am glad that we were able to put the two decisions together in such a short period of time with the representatives of our Member States in the Economic and Financial Committee. This shows that the European Union and the Commission, in particular, can act swiftly, especially when one of our Member States is in need of support. We expect from Hungary that it sticks to its plan to accelerate the deficit reduction, to strengthen banking regulation and supervision and to take structural measures to support employment. We also want to see strong fiscal rules and institutions in place that will significantly prevent budgetary slippages in the future," said European Economic and Monetary Affairs Commissioner Joaquín Almunia.

The Commission today adopted a proposal to grant assistance to Hungary in support of its balance of payments. Under the proposal, which has been discussed with EU's Economic and Financial Committee but has yet to be adopted by ECOFIN, Hungary will benefit of a medium-term loan amounting to a maximum of €6.5 billion, with a maximum average maturity of five years. The loan will be made available in a maximum of five instalments in the context of continued EU surveillance.

The EU support is granted in conjunction with a loan from the International Monetary Fund of €12.5 billion. The World Bank has also agreed to contribute a loan of €1 billion.

The Hungarian budget deficit was reduced to 5% of GDP in 2007 after a pick of 9.3% in 2006. The country's current account imbalance has also been lowered in recent years but it remains high and the national debt is the largest in the region at 65.8% in 2007. As the financial crisis intensified this has put Hungary in a vulnerable situation.

Reacting to the stress in its financial markets, the Hungarian government earlier this month adopted a 12-point action plan to bolster confidence that includes a lowering of the budget deficit to 3.4% this year from an initial target of 3.8% and to 2.6% in 2009 as opposed to 3.2% initially planned in the draft budget. The government has also tabled legislative proposals that create multiannual expenditure ceilings and a Fiscal Council next to a Legislative Budget Office. It also includes measures to support the banking sector and strengthen its supervision.

Overall financial assistance ceiling increased

Separately, the Commission has also proposed to increase to €25 billion the ceiling set in Regulation 332/2002 on the provision of medium-term financial assistance for Member States that experience difficulties with balances of payments. The present ceiling set in 2002 is €12 billion.

The new ceiling will significantly increase the capacity of the EU to answer the potential needs of the Member States outside the euro area.

Background

The assistance facility created in Council Regulation 332/2002 implements the mechanism foreseen by the Article 119 of the Treaty, whereby the EU can grant mutual assistance to a Member State outside the euro area "in difficulties or seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments or as a result of the type of currency at its disposal".