EU prepares €20bn Plan B to Fund Ukraine

The EU is working on a plan to provide Ukraine with a financial back-up of up to 20 billion euros, using a debt-structure that will allow it avoid Viktor Orban’s objections about funding this war-torn nation.

Officials are looking for alternative solutions to prevent Kyiv’s budget crisis from worsening if EU leaders cannot resolve their differences.

Officials in the talks have said that a model funded through debt is the most practical option to support Orban if he refuses to drop his right to veto during a summit planned for February 1.

People briefed about the talks stated that this scheme would see participating member states issue guarantees to the EU Budget, allowing the European Commission the ability to borrow up €20bn for Kyiv on capital markets next year. They said that the exact terms of the agreement are still being discussed and that the final amount will be determined by Ukraine’s requirements.

This arrangement is similar to that used in 2020, when the Commission provided up to €100bn  in cheap financing to EU member states for short-term support schemes during the Covid epidemic.

Importantly, this option does not require the participation of all 27 EU member states as long as it includes countries with high credit ratings. This would allow the EU sidestep Hungary’s right to veto, as it wouldn’t require unanimous support.

Officials hope that the process will be completed by March to allow Ukraine to receive aid.

According to a person familiar with the discussion, no “technical problems” prevented the provision of budget financing to Kyiv. However, “it’s more complicated politically”.

The people briefed about the talks say that if EU leaders agree to this plan by February 1, the IMF will be reassured to release the next tranche of funding to Ukraine, worth around $900mn.

They added that this should be enough to fund Kyiv and avoid the need to resort to monetary funding, in which case the government would have to print money to maintain its deficit, risking inflation spiralling.

This scheme is limited to loans, and does not include grants, compared to the original proposal, which was based on EU budget. The member states can still choose to give bilateral grants.

A second option being considered is to extend the current funding structure, which was used in this year to provide €18bn of cheap loans to Ukraine for a few more months or even up to one year. A weighed majority of countries would have to approve this option.

Officials insist that their preferred option would be to approve the original package of aid, which was first proposed in June and blocked by Hungary.

This top-up of the EU budget is still the preferred arrangement for the Commission because it covers four years. It also includes €4bn to cover other priorities such as defence investments and migration.

According to officials who were briefed last week on a G7 call of finance ministers, whichever model is chosen, the EU promised Ukraine that it would provide funding at the very latest by March.

A spokesperson from the Commission declined to comment.