The EU's support for Hungary comes in conjunction with a wider €12.5 billion rescue plan agreed with the International Monetary Fund (IMF) to help restore the country's economic stability, which has been badly hit by the ongoing financial crisis. A further €1 billion will be provided by the World Bank.
"The European Commission stands ready to provide a loan of €6.5 billion to Hungary," the EU executive said in a statement on Wednesday (29 October), adding that "the concrete modalities will shortly be finalised in cooperation with the Hungarian authorities".
Under the plans, the Commission will borrow money from the markets using EU-denominated bonds and then lend it to Hungary, without drawing from the EU budget. The facility is established under Article 119 of the Treaty.
It is the first time that Brussels has used the instrument to help an EU country (see background). The facility foresees an overall ceiling of €12 billion of outstanding loans. This funding is limited to EU countries which are not part of the euro zone.
The money will be collected on the financial market on behalf of the European Community. Rules governing the use of the facility enable the Commission to issue directly "up to €4 billion" in EU bonds, with maturities ranging between three months to 30 years. "The size reflects a realistic assessment of near-term financing needs and could be rapidly increased at the Commission initiative, if needed," according to the EU executive.
Goldman Sachs and Deutsche Bank are responsible for placing the bonds with European and international investors.
Sarkozy proposes raising the ceiling to €20 billion
Although the €12 billion ceiling has not been reached, it is increasingly likely that other Eastern EU countries will draw from the facility for financial help.
Nicolas Sarkozy, the French president and current EU chair, said he would propose raising the ceiling to €20 billion at an EU summit on 7 November.
"I will propose on 7 November that the European Union itself, which has 12 billion available to support a certain number of liquidities and to support a certain number of states, should go up to at least 20 billion (euros) to increase our capacity to respond to the crisis," Sarkozy said, according to Reuters.
Speaking to EurActiv, an EU official confirmed that "the Commission could also change the regulation and lift the ceiling".
EU bonds for other uses as well?
Turning to the use of EU bonds could also have wider political implications, however limited. If member states agree to issue bonds to provide financial aid to countries such as Hungary, they might be less inclined to oppose demands to use the instrument for other purposes, such as funding EU infrastructure or priority projects, as recently suggested by members of the European Parliament (EurActiv 25/09/08).