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EC: Hungary's debt reduction steps no substitute for real fiscal consolidation

MNB

The European Commission acknowledged recent steps Hungary has taken to reduce its state debt in a report published on Wednesday, but said the steps could not stand in for "genuine fiscal consolidation efforts" and reiterated that the country could face the re-opening of an Excessive Deficit Procedure.

The EC noted that the government had adopted a spending freeze in July equivalent to 0.25-0.3% of GDP in the interest of ensuring state debt as a percentage of GDP remains on a declining path. The decrease is also supported by a year-end reduction of state cash deposits, it added. Although both steps could "mitigate the risk of non-compliance" with the debt reduction benchmark, "they cannot be a substitute for genuine fiscal consolidation efforts in order to put government debt on a firm downward path", the EC said in the report.

The report was a follow-up to a memo issued after a mission to Hungary on June 24-27. In that memo, released days after the visit wound up, the EC said that complying with the debt reduction benchmark "would likely require additional fiscal consolidation efforts in order to avoid that an inadequate pace of debt reduction could trigger the re-opening of an excessive deficit procedure in spring 2015".

In the updated report, the EC said "a re-opening of the EDP could become possible, unless further structural efforts are made". The EC said the scale of these additional efforts was estimated at 0.9% of GDP, based on its Spring forecast for member states. It added that the scale would depend "to an important degree" on other factors, such as GDP growth, the year-end exchange rate and stock-flow adjustment operations.

The EC projected Hungary's net external debt would decline in the medium term, but it said state debt could start increasing again, rising over 80% of GDP "under less favourable macroeconomic scenarios". Hungary's government expects state debt as a percentage of GDP to fall to 76.9% at year-end from 77.3% at the end of 2013 and 78.5% at end-2012.

The EC acknowledged that "fragilities have declined" but said Hungary is still a "vulnerable economy" due to its high level of indebtedness. It noted that net external debt stood at just under 35% of GDP and gross short-term external debt was around 28% of GDP, adding that the refinancing needs of the government sector, at 21% of GDP in 2015-2016, were "at a rather elevated level".

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