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EU Governments Suspend Some of Hungary’s Cohesion Fund Grants as of 2013

March 13, 2012

European Union governments partially froze Hungary’s infrastructure-development aid as of 2013, giving the country until June 22 to take “effective” action to cut its budget deficit and have the sanction lifted.

EU finance ministers suspended 495 million euros ($649 million) in development funds at a meeting in Brussels today. They will revisit the issue “with a view to lifting the suspension if the conditions are met,” the EU said. Hungary must take the “necessary corrective action” to rein in the deficit to unfreeze the grants, it said.

The EU is pushing Prime Minister Viktor Orban to narrow Hungary’s shortfall after raising last week its estimates for the country’s deficits through 2013. The gap may widen to 3.6 percent of gross domestic product next year from 3 percent in 2012, the commission forecasts. EU rules specify that governments keep the annual deficit below 3 percent.

“This provides a strong incentive for Hungary to conduct a sound and sustainable fiscal policy,” EU Economic and Monetary Commissioner Olli Rehn told reporters today. “It’s essential” that government steps are “of a permanent nature and not only one-off measures,” Rehn said, adding that the European Commission took the “worsened macroeconomic outlook” into account when defining Hungary’s fiscal targets.

The forint strengthened 0.8 percent to 291.41 per euro as of 5 p.m. in Budapest. The yield on the country’s benchmark five-year bond fell 5 basis points to 8.53 percent. A basis point is 0.01 percentage point.

The EU invoked a clause that enables them to suspend commitments for the first time since the cohesion fund was set up in 1994, it said in a statement.

‘Sustainable and Credible’

The June 22 deadline gives Hungary less time than the commission’s initial recommendation on March 6 to allow six months to “take steps to correct its excessive deficit in a sustainable and credible manner.” The commission, the EU’s regulatory arm, will assess “without delay” whether Hungary has taken corrective action, according to the EU.

Orban, who took office in 2010, levied extraordinary industry taxes and effectively nationalized private pension savings to rein in the deficit and boost revenue after cutting the personal income tax. The country had a budget surplus of as much as 3.5 percent of GDP last year as a result of the one-time revenue, Economy Minister Gyorgy Matolcsy said on Jan. 23.

The government is “100 percent” confident of meeting the June 22 deadline, Matolcsy said in Brussels today, calling the decision a “reasonable solution.”

‘Convince the Commission’

“I’m not sure Hungary can convince the European Commission that it has taken enough steps by June,” Peter Attard Montalto, economist at Nomura Plc, said in an e-mail today. “I think Hungary will underestimate what the European Commission is after and just use headline, one-off measures.”

Austrian Finance Minister Maria Fekter said she was “confident” that Hungary will make an effort to set the necessary steps to avoid the suspension of aid.

“The Hungarian minister has assured us that the majority of necessary decisions already is in parliament and will be passed by mid-May,” Fekter told reporters in Brussels today, following a meeting of EU finance ministers.

Orban’s government, which is seeking to revive bailout talks with the EU and the International Monetary Fund, remains embroiled in a separate legal dispute with the 27-nation bloc that has blocked the start of aid negotiations.

The EU last week took a formal step toward seeking a court order to make Hungary redraft laws on the judiciary and the data-protection agency and asked for more information on planned changes to a new central-bank law.

“We are ready for starting the negotiations with the IMF and the European Commission,” Matolcsy said.

Hungary taking further one-off or “distortionary” budget measures may cause “difficulties” in financial-aid talks as such action may conflict with the international lenders’ conditions, Montalto said.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; James M. Gomez at jagomez@bloomberg.net


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