EU readies €20bn plan B to fund Ukraine

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The EU is preparing a back-up plan worth up to €20bn for Ukraine, using a debt structure that sidesteps the objections of Hungary’s Viktor Orbán about funding the war-torn country.

After EU leaders failed to agree a planned €50bn four-year package for Ukraine earlier this month, officials have searched for alternatives to save Kyiv from a looming budget crisis if EU differences cannot be resolved.

Officials involved in talks said one model funded by debt has gained traction as the most practical way to provide support if Orbán refuses to drop his veto at a planned summit on February 1.

This scheme would involve participating member states issuing guarantees to the EU budget, enabling the European Commission to borrow up to €20bn on capital markets for Kyiv next year, people briefed on the discussions said. The precise terms are still under discussion and the final amount would be set according to Ukraine’s needs, the people said.

The arrangement is similar to the structure used in 2020 when the commission provided up to €100bn in cheap financing to EU countries for short-term work support schemes during the Covid pandemic.

Crucially the option would not require guarantees from all the EU’s 27 member states, as long as the main participants included countries with top credit ratings. That would allow the EU to sidestep Hungary’s veto as it would not require unanimous backing.

Some countries, including Germany and the Netherlands, would need parliamentary approval for national guarantees, a process that officials hope could be completed in time to provide aid to Ukraine by March.

One of the people said there was no “technical problem” with finding ways to provide budget finance to Kyiv, but that politically “it is more complicated”.

If EU leaders agree on this plan on February 1, it would provide reassurance to the IMF to release its next tranche of funding for Ukraine worth about $900mn, the people said.

That should provide sufficient funding to Kyiv to avoid having to resort to monetary financing, where the government would print money to sustain its deficit and risk inflation spiralling, the people said.

One downside of this scheme, when compared with the original proposal based on the EU budget, is that it would be limited to loans and not include grants. Member states could still decide to provide grants bilaterally, the people said.

Another back-up option under consideration involves rolling over the funding structure used this year, under which the EU provided €18bn in cheap loans to Ukraine, for a few months and up to a year. This option would require a weighted majority of countries to agree.

But officials stress that their preferred option is to approve the unaltered aid package first proposed in June but blocked by Hungary. That top-up to the EU budget, which remains the commission’s preferred arrangement because it covers a four-year timeline, also includes €4bn for other priorities, including defence investments and migration.

Regardless of the model chosen, the EU has promised Ukraine it will provide funding by March at the latest, according to officials briefed on a call between G7 finance ministers last week.

A spokesperson for the commission declined to comment.