Proposal for a Council Decision providing Community medium-term financial assistance for Hungary
Date: 2008-10-30
Institutions: European Commission
Subjects: EU aid, Hungary, economic aid, economic stabilisation

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.10.2008 
COM(2008) 716  final 

Recommendation for a 

COUNCIL DECISION 

Granting mutual assistance for Hungary 

Proposal for a 

COUNCIL DECISION 

Providing EU medium-term financial assistance for Hungary 

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Recommendation for a 

COUNCIL DECISION 

Granting mutual assistance for Hungary 

and 

Proposal for a 

COUNCIL DECISION 

Providing EU medium-term financial assistance for Hungary 

EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION 

Since  mid-2006,  the  Hungarian  authorities  are  making  significant  efforts  to  correct  the 
country's accumulated external and internal imbalances. Despite the tangible results achieved 
over the last two years, including the significant reduction in the general government deficit 
and the gradual decrease in the current account deficit, the Hungarian financial markets came 
under  severe  stress  from  early  October  2008.  This  is  linked  to  the  comparatively  high 
financial  vulnerabilities  due  to  Hungary's  large  external  debt  (close  to  100%  of  GDP), 
recently  fuelled  by  foreign-currency  loans  to  the  private  sector  and  the  highest  public  debt 
ratio in the region (around 66% of GDP). The authorities rapidly announced a comprehensive 
policy package designed to restore investor confidence and alleviate the stress experienced in 
financial markets. Measures include an accelerated deficit reduction both in 2008 and 2009, 
which  would  decrease  the  government's  financing  need,  and  a  number  of  targeted  steps  to 
unfreeze  the  government  debt  market  and  increase  liquidity  in  the  foreign  exchange  swap 
market.  However,  as  a  rapid  deterioration  in  the  capital  and  financial  account  could  be 
expected  in  2008  and  especially  2009  induced  by  the  financial  markets  turbulences,  the 
country will need substantial financial support in this period, possibly in the order of EUR 20 
billion until end 2009.  

2. 

MACROECONOMIC DEVELOPMENT AND OUTLOOK 

In  mid-2006,  a  fiscal  consolidation  programme  was  launched  to  correct  the  high  fiscal  and 
external imbalances that have built up in previous years (the general government deficit stood 
at  9.3%  in  2006  and  the  current  account  at  7.5%).  The  measures  included,  inter  alia, 
expenditure  freezes,  cuts  in  public  investments,  tax  increases  and  reduced  price  subsides. 
Consequently,  the  output  of  the  government  sector  was  reduced  considerably,  especially  in 
health care, education and administration. In 2007, the private sector showed some resilience 
in dealing with the downturn supported by access to new credit. Thanks to a strong expansion 
of exports of some 16%, investment still expanded slightly although corporate profits fell due 
to  a  substantial  increase  in  wage-related  costs.  Consumption  also  increased  moderately  by 

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0.7%  despite  a  drop  in  real  wages  as  the  surge  in  oil  and  food  prices  was  accompanied  by 
increases in regulated prices and a value-added tax hike. Overall, annual GDP growth slowed 
down from 4.1% in 2006 to 1.1% in 2007 while inflation doubled to nearly 8%, well above 
the official inflation target.  

With the effects of the fiscal package gradually phasing out, the economy was set to recover 
starting in 2008 and reach potential growth (somewhat below 3%) in 2-3 years. However, the 
stronger-than-anticipated  slowdown  in  the  EU  and  the  rest  of  the  world  substantially 
weakened  the  outlook  for  export  performance,  the  main  driving  force  for  the  Hungarian 
economy  in  the  past  years.  The  current  financial  difficulties  and  related  tightening  of  credit 
conditions  have  added  to  the  downturn,  and  further  worsened  growth  prospects.  Private 
consumption  and  household  investment  suffer  most  from  tighter  credit  conditions,  while 
corporate  investments  would  still  hold,  with  some  support  expected  from  inflows  from  EU 
(structural and cohesion) funds. Thus annual GDP growth is expected to remain well below 
2%  in  2008  and  sharply  fall  in  2009  before  it  slowly  recovers  in  2010.  Given  the  high 
uncertainties in the context of present financial market conditions, there are even some risks 
that GDP could contract in 2009 followed by a protracted recovery thereafter. 

3. 

PUBLIC FINANCES 

In 2007, the general government deficit came out at 5% of GDP, sharply down from 9.3% of 
GDP  in  2006.  This  was  the  result  of  the  fiscal  consolidation  programme  started  by  the  re-
elected  Government  in  summer  2006,  including  a  series  of  tax  increases  as  well  as  cuts  in 
price  subsides,  expenditure  freezes  (notably  for  the  public  wage  bill)  and  a  nominal  cut  in 
public  investment.  In  mid-July  2008,  based  on  the  better-than-expected  central  government 
revenues in the first half, the Government revised its deficit forecast to 3.8% of GDP (from its 
target  of  4%  of  GDP  contained  in  the  most  recent  Convergence  Programme  update  and 
endorsed by the Council). 

As  a  reaction  to  the  turbulences  on  the  Hungarian  financial  markets,  the  Government 
announced on 10 October a 12-point action plan to foster market confidence. Most notably, 
the plan included the lowering of the budget deficit targets: to 3.4% of GDP from 3.8% for 
2008, and to 2.9% of GDP from 3.2% for 2009, which was subsequently further reduced to 
2.6% of GDP. For 2008, the achievement of the more ambitious deficit target of 3.4% of GDP 
would  be  backed  by  the  following  measures:  (i)  expenditure  savings  in  some  government 
programmes  and  lower  expected  expenditure  on  co-financing  due  to  slower-than-targeted 
absorption  of  EU  funds  (0.15  of  GDP);  as  well  as  (ii)  a  permanent  freeze  of  the  unutilised 
budgetary  reserves  (0.3%  of  GDP)  if  needed.  Regarding  2009,  the  lower  deficit  target  by 
0.6% of GDP is foreseen to be achieved through (i) the withdrawal of the planned tax changes 
which were officially expected to result in a 0.55% of GDP revenue loss in 2009, while the 
compensatory expenditure measures would remain in place and (ii) additional 0.6% of GDP 
expenditure  cuts  (reducing  government  programmes  and  operative  costs  of  budgetary 
institutions  as  well  as  postponing  the  indexation  of  some  social  transfers)  included  in  the 
revised draft budget submitted on 18 October  as well  as  (iii)  additional  measures  of  around 
1%  of  GDP  namely  reducing  the  13th  month  payments  of  pensions  and  public  salaries,  as 
well as freezing public sector wages.  

The revitalisation of the fiscal governance reform process is also part of the Government's 12-
point  action  plan.  The  revised  legislative  document  was  submitted  to  Parliament  on  17 
October.  It  integrates  some  important  elements  of  the  alternative  proposals  of  opposition 
parties  (e.g.  multiannual  expenditure  ceilings  for  the  central  government  subsector  and  the 
establishment  of  a  Fiscal  Council  next  to  the  Legislative  Budget  Office).  The  revised  plan 

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prescribes  that  the  annual  budget  would  be  embedded  in  a  3-year  framework,  including 
medium-term numerical rules. The new legislative proposal is foreseen to be passed by simple 
majority.  

4. 

FINANCIAL MARKETS  

While for most of 2008 the conditions on Hungarian financial markets had evolved broadly in 
line with those of its regional peers (though with some episodes of higher volatility1), markets 
came  under  heavy  pressure  at  the  beginning  of  October,  with  a  freeze  on  the  government 
primary  bond  market,  a  very  sharp  fall  in  the  stock  market  and  a  sharp  depreciation  of  the 
exchange rate, leading to a significant increase in spreads of government bond yields and of 
credit  default  swaps  (CDS).  This  seems  to  be  linked  to  a  liquidity  shortage  in  the  financial 
system, in particular regarding foreign exchange liquidity, which is becoming more costly due 
to  the  perception  that  counterparty  risk  has  increased  and  heightened  risk  aversion  vis-à-vis 
the Central and Eastern European Countries.  

Following  the  market  turmoil  in  early  October,  the  authorities  announced  several  measures 
aimed directly at reducing financial stress. On top of the tightening of budgetary plans, which 
lowers  net  financing  requirements,  these  included  the  following  elements:  (1)  an  easing  of 
investment rules for pension funds, (2) the opening of a new foreign exchange swap facility 
the National Bank of Hungary (MNB) on 13 October, aimed at matching buyers and sellers 
for  foreign  exchange  swaps  to  overcome  counterparty  risk,  (3)  a  new  stand-by  facility  for 
banks offered from 16 October by which the MNB can provide banks overnight euro-forint 
swaps.  This  new  facility  is  backed  up  by  an  agreement  on  repurchase  transactions  with  the 
ECB, by which the ECB will provide MNB with a facility to borrow up to EUR 5 billion. (4) 
On 16 October, the MNB also announced measures to shore up the domestic bond market in 
agreement with primary dealers. (5) On 22 October, the NBH raised its interest rate by 300 
basis  points  in  order  to  stem  the  falling  of  the  local  currency  (by  that  time,  the  Hungarian 
forint had lost 14% against the euro since the beginning of October). 

In  addition,  the  Hungarian  Parliament  adopted  on  13  October  an  increase  of  the  deposit 
insurance threshold from HUF 6 million to HUF 13 million. Around 90% of eligible deposits 
are estimated to be covered by this new limit. The legislative action was accompanied by a 
political  commitment  to  guarantee  all  deposits  in  case  of  need.  Moreover,  the  Hungarian 
authorities  have  intensified  their  co-operation  with  the  country's  Financial  Stability 
Committee (created in 2004) and scaled up cross-border contacts among supervisors. 

5. 

BALANCE OF PAYMENT AND EXTERNAL FINANCING REQUIREMENTS 

Net export growth, boosted by brisk growth worldwide, was the main driving force of GDP 
growth over the past years, and it also largely contributed to the gradual decline in the current-
account-deficit-to-GDP ratio, which fell from 7.5% in 2006 to 6.4% in 2007. The other main 
factor in 2007 proved to be the substantial reduction in the financing need of the government. 
In the capital account an increasing surplus was registered that reached 1.1% of GDP in 2007, 
partly  due  to  the  growing  absorption  of  EU  funds  so  that  overall  net  external  liabilities 
stabilised,  albeit  at  a  high  level  (at  97%  of  GDP).  At  the  same  time,  debt-type  instruments 
gained a larger share in the external deficit. This reflects inter alia persistently high FDI and 
portfolio  outflows  by  residents  which  over  time  should  contribute  positively  to  the  income 

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For example, the government bond market came temporarily under pressure in spring 2008, mainly due 
to a portfolio shift by domestic pension funds. 

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balance  on  the  current  account.  While  the  share  of  non  debt-creating  financing  rebounded 
slightly in the first half of 2008 (to about one-third of the total), the share of short-term debt 
(with  a  maturity  below  1  year)  in  overall  debt  increased  to  a  level  of  some  23%  of  GDP, 
mainly due to rising external liabilities of the financial sector, which now represents 35% of 
GDP (while the share of the government in external debt is 30%). 

The current account is expected to continue declining this and especially next year in view of 
the  recent  depreciation  of  the  forint  and  a  sharp  reduction  in  import  growth  in  2009.  The 
capital  account  is  also  likely  to  improve  as  the  absorption  of  already  committed  EU  funds 
increases. On the other hand, based on recent developments, in particular since the beginning 
of  October,  it  can  be  expected  that  net  portfolio  outflows  (including  financial  derivatives) 
would  accelerate,  notably  as  external  borrowing  by  the  government  and  banks  contracts 
sharply, contributing to a substantial deterioration in the capital and financial account in 2008 
and especially 2009. Against this background, in order to support the balance of payments and 
bring international currency reserves to a prudent level, the IMF and the Commission consider 
that Hungary will need substantial financial assistance in the short and medium term, in the 
order of EUR 20 billion until end 2009. 

In  light  of  the  above,  the  Commission  is  of  the  opinion  that  there  is  a  serious  threat  to  the 
Hungarian balance of payments; the Commission thus recommends to the Council a decision 
granting mutual assistance. 

6. 

EU  SUPPORT  UNDER  THE  BALANCE  OF  PAYMENTS  FACILITY  PART  OF 
INTERNATIONAL EFFORT 

Medium-term  financial  assistance  for  Hungary  under  the  balance  of  payments  facility  for 
Member  States  (in  view  of  Regulation  No  332/2002)  appears  to  be  appropriate  under  the 
current circumstances. It would intervene at a moment when Hungary is seriously threatened 
with difficulties in its balance of current payments in view of the heightened financial market 
stress although its policy record has substantially improved since mid 2006. The EU support 
for  Hungary  would  be  part  of  a  bigger  financing  package  for  Hungary  in  which  the  IMF 
provides  a  loan  of  SDR  10.5 billion  (around  EUR  12.5 billion)  under  the  Stand-by 
arrangement  expected  to  be  approved  on  6  November  2008  and  the  World  Bank  a  loan  of 
EUR 1 billion. It is crucial that the large financial institutions operating in Hungary continue 
providing  adequate  financing  of  the  economy.  The  EU  financial  assistance  is  provided  in 
implement  a 
support  of 
comprehensive  economic  policy  programme  designed  to  restore  investor  confidence  and 
alleviate  the  stress  experienced  in  recent  weeks  in  the  Hungarian  financial  markets.  This 
programme  will  be  included  in  the  Convergence  Programme  update.  In  particular,  the 
acceleration  of  the  fiscal  consolidation,  which  reduces  the  financing  needs,  and  the  planned 
progress  in  fiscal  governance  reform  are  in  line  with  previous  Council  recommendations  in 
the context of opinions on the November 2007 convergence programme and on the October 
2007 Implementation Report of the National Reform Programme. The EU assistance and the 
Commission's  involvement  would  also  help  ensure  full  consistency  of  current  policies 
supported by the whole financing package with EU policy recommendations.  

the  strong  commitment  by 

the  Hungarian  authorities 

to 

Economic  policy  conditionality  would  include  reform  of  fiscal  governance  and  support  the 
increased  ambition  in  terms  of  deficit  reduction  which  would  ensure  that  the  planned 
correction  of  the  excessive  deficit  (by  2009  at  the  latest),  as  recommended  in  the  Council 
recommendation  under  the  excessive  deficit  procedure  of  10  October  2006,  is  respected.  It 
would also include structural reform measures supported in the context of the Lisbon strategy, 
such as the reinforcement of incentives to work with a view to raising employment rates and 

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contributing to the long-term sustainability of public finances. Monetary policy should remain 
geared  towards  price  stability  and  the  achievement  of  the  MNB  inflation  target  (currently 
3%). Moreover, it would include the speedy and forceful implementation of the decisions to 
shape  up  the  functioning  of  the  financial  sector.  Finally,  the  monitoring  of  conditionality 
would also take into account progress with the implementation of performance criteria under 
the IMF programme. They include (i) quarterly ceilings on cumulative cash primary spending 
of  the  central  government,  social  security  funds  and  extra-budgetary  funds;  (ii)  no 
accumulation  of  external  arrears  by  the  public  sector;  (iii)  floor  on  the  flow  of  net 
international  reserves;  and  (iv)  a  consultation  band  for  the  12-month  rate  of  change  of  the 
national  CPI.  In  particular, 
the  enhanced  monitoring  of  within-the-year  budgetary 
developments could be a useful additional tool of keeping the budget on track to achieve the 
official deficit target.  

To ensure the necessary flexibility in the current market context, it is proposed to allow the 
option of using interest rate swaps for the borrowing operation which finances the loan. The 
counterparties of a potential swap would have to be of the highest credit quality in order to 
safeguard the EU budget. 

Against  this  background,  following  the  consultation  of  the  Economic  and  Financial 
Committee,  the  Commission  is  recommending  to  the  Council  the  granting  of  the  mutual 
assistance foreseen by the Article 119 of the Treaty. 

The  Commission,  following  the  consultation  of  the  Economic  and  Financial  Committee,  is 
furthermore  proposing  that,  after  adopting  the  above-mentioned  decision  of  the  Council  to 
provide  mutual  assistance  to  Hungary  on  a  recommendation  from  the  Commission,  the 
Council adopts a decision providing under the EU facility for Member States (as governed by 
Council  Regulation  (EC)  No  332/2002  of  18  February  2002)  a  medium-term  financial 
assistance  to  Hungary  of  up  to  EUR  6.5  billion  to  underpin  its  balance  of  payments 
sustainability.  This  support  would  be  provided  in  conjunction  with  an  IMF  arrangement.  It 
would be disbursed in up to 5 instalments and be linked to economic policy conditions. The 
proposed decision would expire two years after entry into force. 

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Recommendation for a 

COUNCIL DECISION 

Granting mutual assistance for Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 
119, 

Having  regard  to  the  recommendation  from  the  Commission  made  after  consulting  the 
Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

Since  mid-2006,  the  Hungarian  authorities  have  been  making  significant  efforts  to 
correct  the  country's  accumulated  external  and  internal  imbalances.  Despite  the 
tangible results achieved over the last two years, including the significant reduction in 
the general government deficit and the gradual decrease in the current account deficit, 
the  Hungarian  financial  markets  have  come  under  severe  stress  from  early  October 
2008, 

The  authorities  of  Hungary  adopted  in  October  2008  a  comprehensive  economic 
policy  programme  designed  to  restore  investor  confidence  and  alleviate  the  stress 
experienced in recent weeks in the Hungarian financial markets; it includes measures 
to  secure  adequate  liquidity  and  financing  for  the  banking  system,  actions  to  ensure 
adequate  capitalization  of  banks,  as  well  as  plans  to  ensure  fiscal  sustainability  and 
contain  financing  needs;  in  particular,  the  Government  revised  its  deficit  target  for 
2008 to 3.4% of GDP compared to a budgeted 4% of GDP and for 2009 from 3.2% of 
GDP  to  2.6%  of  GDP;  this  economic  programme  and  in  particular  the  fiscal  targets 
will be reflected in the Government budget as well as in the Convergence Programme 
which also contain other policy measures and structural reforms,  

The  Council  is  reviewing  on  a  regular  basis  the  economic  policies  implemented  by 
Hungary, in particular in the context of the annual reviews of Hungary's update of the 
convergence programme and implementation of the National Reform Programme, the 
regular review of progress made by Hungary related to the Council recommendation 
the Excessive Deficit Procedure, as well as in the context of the Convergence Report, 

Despite  the  expected  improvement  in  the  current  account,  Hungary  faces  important 
financing needs in 2008 and 2009 (estimated at around EUR 20 billion) as the recently 
experienced  financial  market  developments  suggest  that  the  capital  and  financial 
account could substantially deteriorate, with the acceleration of net portfolio outflows,  

The Hungarian authorities have requested substantial financial assistance from the EU 
and  other  international  financial  institutions  and  countries  to  support  balance  of 
payments sustainability and bring international currency reserves to a prudent level, 

There  is  a  serious  threat  to  the  Hungarian  balance  of  payments  which  justifies  the 
urgent granting of mutual assistance by the Community.  

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HAS ADOPTED THIS DECISION:  

The Community shall grant mutual assistance to Hungary.  

This Decision is addressed to the Member States. 

Article 1 

Done at Brussels,  

For the Council 
The President  

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Proposal for a 

COUNCIL DECISION 

Providing Community medium-term financial assistance for Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community,  
Having regard to Council Regulation (EC) No 332/20022 of 18 February 2002 establishing a 
facility providing medium-term financial assistance for Member States' balance of payments 
and in particular Article 3(2), 

Having regard to the proposal from the Commission made after consulting the Economic and 
Financial Committee (EFC), 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

Council decision [….] has decided to grant mutual assistance to Hungary. 

Despite  the  expected  improvement  in  the  current  account,  Hungary's  external 
financing  needs  in  2008  and  2009  are  estimated  at  EUR  20 billion  as  in  view  of  the 
recently experienced financial market developments the capital and financial account 
could substantially deteriorate, with the acceleration of net portfolio outflows, 

It is appropriate to provide Community support to Hungary of up to EUR 6.5 billion 
under  the  Facility  providing  medium-term  financial  assistance  for  Member  States' 
balance  of  payments  established  in  2002  by  Regulation  (EC)  No  332/2002.  That 
assistance  should  be  provided  in  conjunction  with  a  loan  from  the  International 
Monetary  Fund  of  SDR  10.5 billion  (around  EUR  12.5  billion)  under  a  Stand-by 
arrangement expected to be approved on 6 November 2008. The World Bank has also 
agreed to provide a loan to Hungary of EUR 1 billion, 

The  assistance  should  be  managed  by  the  Commission  who  would  agree  with  the 
authorities  of  Hungary,  after  consulting  the  EFC,  the  specific  economic  policy 
conditions attached to the financial assistance. Those conditions should be laid down 
in a Memorandum of Understanding. The detailed financial terms should be laid down 
by the Commission in the Loan Agreement, 

The assistance should be provided with a view to supporting the balance of payments 
sustainability 
the  successful 
implementation  of  the  Government's  economic  policy  programme  under  current 
economic and financial conditions. 

this  way,  contributing 

in  Hungary  and, 

in 

to 

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OJ L53/1 [23 February 2002] 

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HAS DECIDED AS FOLLOWS:  

1. 

2. 

1. 

2. 

3. 

1. 

2. 

3. 

4. 

Article 1 

The Community shall make available to Hungary a medium-term loan amounting to 
a maximum of EUR 6.5 billion, with a maximum average maturity of 5 years.  

The  Community  financial  assistance  shall  be  made  available  during  two  years 
starting from the first day after the entry into force of this Decision. If circumstances 
so  require,  the  Commission  may  after  consultation  of  the  Economic  and  Financial 
Committee, decide to extend that period by a maximum of two years. 

Article 2 

The  assistance  will  be  managed  by  the  Commission  in  a  manner  consistent  with 
Hungary's  undertakings  and  recommendations  by  the  Council,  in  particular  in  the 
context of the implementation of the National Reform Programme as well as of the 
convergence programme and the excessive deficit procedure.  

The  Commission  shall  agree  with  the  authorities  of  Hungary,  after  consulting  the 
EFC, the specific economic policy conditions attached to the financial assistance as 
laid down in Article 3(4). Those conditions shall be laid down in a Memorandum of 
Understanding consistent with the undertakings and recommendations referred to in 
paragraph (1). The detailed financial terms shall be laid down by the Commission in 
the loan agreement. 

The Commission shall verify at regular intervals in collaboration with the EFC that 
the economic policy conditions attached to the assistance are fulfilled. The EFC shall 
be  kept  informed  by  the  Commission  of  possible  refinancing  of  the  borrowings  or 
restructuring of the financial conditions. 

Article 3 

The Community financial assistance shall be made available by the Commission to 
Hungary in maximum five instalments the size of which would be laid down in the 
Memorandum of Understanding.  

The  first  instalment  shall  be  released  subject  to  the  entry  into  force  of  the  Loan 
Agreement and Memorandum of Understanding.  

If  required  in  order  to  finance  the  loan,  the  prudent  use  of  interest  rate  swaps  with 
counterparties of highest credit quality shall be permitted. 

The  Commission  shall  decide  on  the  release  of  further  instalments  after  having 
obtained the opinion of the EFC. The disbursement of each further instalment shall 
be  made  on  the  basis  of  a  satisfactory  implementation  of  the  new  economic 
programme of the Hungarian Government included the Convergence Programme of 
Hungary and, more particularly, the specific economic policy conditions laid down in 
the  Memorandum  of  Understanding.  These  would  include,  inter  alia,  progress  with 
fiscal  consolidation  planned  by  the  Government  in  line  with  the  Council 
recommendation under the excessive deficit procedure of 10 October 2006 as well as 
the  Council  Opinion  on  the  November  2007  convergence  programme  update; 
specific  measures  to  control  expenditure  underlying  the  consolidation  process,  as 
well as progress with fiscal governance and financial supervision reform; structural 

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reform  measures  supported  in  the  context  of  the  Lisbon  strategy,  such  as  the 
reinforcement  of  incentives  to  work  with  a  view  to  supporting  employment  and 
contributing to the long-term sustainability of public finances.  

This Decision is addressed to the Republic of Hungary. 

Done at Brussels,  

For the Council 
The President  

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BUDGETARY IMPACT STATEMENT 

(cf. Article 16 of the Internal Rules)  

POLICY AREA: TITLE 01 – ECONOMIC AND FINANCIAL AFFAIRS 
ACTIVITY: FINANCIAL OPERATIONS AND INSTRUMENTS 
TITLE OF ACTION: EU MEDIUM-TERM FINANCIAL ASSISTANCE FOR 
HUNGARY 

1. 

NAME  OF  THE  PROPOSAL:  BUDGET  HEADING  CONCERNED  AND 
TITLE 

01  04  01  01  EC  guarantee  for  Community  loans  raised  for  balance-of-payments 
support 

2. 

LEGAL BASIS: 

Art. 119 EC and 308 EC; Council Regulation N° 332/2002 of 18 February 2002.  

The  Regulation  limits  the  amount  in  principal  of  loans  to  be  granted  to  Member 
States under this Facility to EUR 12 billion. No loans have been granted under the 
Facility since this Regulation came into force. 

3. 

OVERALL FIGURES FOR THE FINANCIAL YEAR (IN EUROS) 

This item constitutes the structure for the guarantee provided by the European Union. 
It will enable the Commission to service the debt (principal, interest and other costs) 
should the debtor (Hungary) default.  

The  budget  entry  ("p.m.")  reflecting  the  budget  guarantee  will  be  activated  only  in 
the case of an effective call on the guarantee. It is expected that normally the budget 
guarantee  will  not  be  called.  Before  Hungary  was  not  yet  a  Member  State,  the 
Council, based on decisions 1990/83/EEC of 25 February 1990 and 91/310/EEC of 
24  June  1991  provided  macro-financial  assistance  to  Hungary  totalling  ECU  790 
million. All macro-financial assistance had been repaid by 1998.  

CA 

3a – Current year 

Not applicable 

Initial appropriation for the 
financial year (budget) 

Transfers 

Additional appropriation  

Total appropriation 

Appropriations  already  set 
aside  by  another  work 
programme 

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Balance available 

Amount  for  the  action 
proposed 

3b – Carry overs 

Not applicable 

Carry-overs 

Appropriations  already  set 
aside 
another  work 
by 
programme  

Balance available 

Amount for the action 
proposed 

3c – Next financial year 

Not applicable 

Initial appropriation for the 
financial year (budget) 

Transfers 

Additional appropriation 

Total appropriation 

Appropriations  already  set 
aside  by  another  work 
programme 

Balance available 

Amount for the action 
proposed 

CA 

CA 

p.m. 

p.m. 

4. 

DESCRIPTION OF THE ACTION 

The proposed medium-term financial assistance to Hungary consists of a Community 
loan (to be financed by Community borrowings in the international capital markets) 
in  the  amount  of  EUR  6.5  billion.  It  will  be  provided  in  the  context  of  an 
international financing package, and in particular by an IMF loan of SDR 10.5 billion 
(around  EUR  12.5  billion) supported by the stand-by facility. The World Bank  has 
also  committed  a  total  of  EUR  1 billion.  The  Community  medium-term  financial 

EN 

13 

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support to Hungary is intended to support the balance of payments sustainability of 
Hungary which is seriously threatened and thereby also to support the new economic 
programme  of  the  government  aiming,  among  other  things,  at  restoring  investor 
confidence and alleviating the stress recently experienced in financial markets from 
early  October  2008.  The  assistance  reflects  the  willingness  to  support  a  Member 
State  whose  policy  record  has  substantially  improved  since  mid- 2006,  including 
through the significant reduction in the general government deficit. At the same time, 
this  assistance  makes  a  contribution  to  financial  stability  that  goes  beyond  the 
beneficiary country in view of the important international (including interbank) links. 
The  new  economic  package  hereby  supported  includes  an  accelerated  deficit 
reduction both in 2008 and 2009, which would decrease the government's financing 
need, as well as a number of targeted steps to unfreeze the government debt market 
and  increase  liquidity  in  the  foreign  exchange  swap  market.  Finally,  the  assistance 
managed  by  the  Commission  in  consultation  with  the  Economic  and  Financial 
Committee is a way to ensure that the EU remains closely involved in the shaping of 
economic policies in Hungary and that those policies are consistent with Hungary's 
undertakings in the EU context and recommendations by the Council, in particular as 
concerns  the  implementation  of  the  National  Reform  Programme  as  well  as  of  the 
convergence programme and the excessive deficit procedure.  

The  Community  borrowings  raised  on  the  capital  markets  or  from  financial 
institutions  for  the  purpose  of  extending  the  loan  to  Hungary  are  covered  by  the 
Community  guarantee.  The  loan  is  raised  on  the  capital  markets  or  from  financial 
institutions.  The  amount  in  principal  of  loans  which  will  be  granted  to  Hungary 
amounts to EUR 6.5 billion. 

The  structure  for  the  guarantee  provided  by  the  European  Union  will  enable  the 
Commission to service the debt should Hungary default. 

In order to honour its obligations, the Commission may draw on its cash resources to 
service  the  debt  provisionally.  In  this  case,  Article  12  of  Council  Regulation  (EC, 
Euratom)  No  1150/2000  of  22  May  2000  implementing  Decision  2000/597/EC, 
Euratom  on  the  system  of  the  Communities’  own  resources  (OJ  L  130,  31.5.2000, 
p. 1) will apply. 

5. 

METHOD OF CALCULATION ADOPTED 

Not applicable. 

6. 

PAYMENT SCHEDULE (IN EURO) 

Not applicable. 

Heading 

Appropriations 

Payments 

Year n 

Year n+1  Year n+2  Year n+3 

Subsequent 
financial 
years 

Year n 

Year n+1 

Year n 

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Year n+1   

Total 

EN 

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   EN