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".
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