WRAPUP 2-EU states seek new budget rule due to pension reform

* Countries want pension reform costs exempted from deficit

* EU executive says call for change “relevant”

* Deficits, debts would be lower if pension cost accounted

* German finance ministry says “very sceptical”

(Adds German finmin comment)

By Sandor Peto and Jan Strupczewski

BUDAPEST/BRUSSELS, Aug 17 (BestGrowthStock) – Nine mostly eastern
European Union states have asked the bloc to consider changing
its accounting rules in a way that could cut the budget deficit
and debt levels of states that implement pension reforms.

Germany, however, immediately voiced scepticism about the
proposal.

The call to review accounting rules comes after months of
market turmoil prompted many EU governments to cut costs and
tackle huge debt piles to try to allay concerns that weak public
finances could potentially lead to national bankruptcies or
break apart the euro zone.

In a letter to the European Commission dated Aug. 6,
Lithuania, Latvia, Bulgaria, Sweden, Slovakia, Hungary, Romania,
Poland and the Czech Republic backed automatic sanctions
proposed by Germany for countries that breach the EU’s 3 percent
of gross domestic product fiscal deficit ceiling.

However, they also asked the bloc to consider reviewing how
to treat costs related to pension reforms, which they argue are
inflating their budget shortfalls despite creating longer-term
benefits.

“Maintaining the current approach to debt and deficit
statistics would result in unequal treatment of member states
and thus effectively punish reforming countries,” the nine
countries said in the letter obtained by Reuters on Tuesday.

The European Commission said the proposal was “relevant” and
that it would soon prepare a position. One EU source said there
was likely to be sympathy for the position, but it may be to
convince all 27 members to agree on changing the Stability and
Growth Pact, the treaty that dictates the Union’s budget rules.

That was illustrated almost immediately when Germany, the
Union’s main economic motor and the leading proponent of strict
punishment for budget-rule breakers, said it was “very
sceptical” about the proposal.

“The introduction of exceptions in the definition of debt
would make the figures more difficult to interpret at the EU
level,” a German finance ministry spokesman said. “It would also
disadvantage governments that have chosen different ways of
reforming their pension systems and share the costs of the
reform differently.”

PUBLIC/PRIVATE

The main issue is that countries that have reformed pensions
so younger workers also pay into private accounts, rather than
only into single pay-as-you-go systems, now lack revenues to
cover the costs of older workers and retirees.

In 2005, the EU altered the Pact’s rules to deduct pension
reform costs at diminishing rates for five years from the moment
the reform is started. For those who had the new pension system
already in place in 2005, the five years were counted from 2004.

With the deductions now ending for countries like Poland and
Hungary, costs tied to plugging those holes will appear in
fiscal deficits and government debt.

The nine countries therefore call for the costs of pension
reform to be excluded from the deficit and debt calculations not
only for five years in diminishing parts but permanently, a
Hungarian government official said.

“Raising the issue (in the letter) means that this practice
should be brought back — that is allowing the opportunity which
existed earlier temporarily to exist permanently,” Economy
Ministry Secretary of State Andras Karman told Reuters.

MARKET CONCERN

Hungary added a mandatory private pension pillar to its
state pension system in 1997. Since then, payments into the
private funds are missing from state revenue but, according to
Citibank, private pension funds hold 10 percent of Hungary’s
gross domestic product, 50 percent in state bonds.

Analysts said the proposed accounting change would lower
Budapest’s budget deficit by about 1.7 percent of GDP each year,
from a government goal of 3.8 percent this year.

In Poland, contributions to private funds account for about
2 percent of GDP each year. Earlier this month, Poland’s ruling
Civic Platform party caucus leader, Tomasz Tomczykiewicz, said
an exclusion could cut Poland’s public debt to around 40 percent
of GDP, from an estimated 50 percent now.

“This will be a key matter for us during our EU presidency.
That would also speed up Poland’s euro zone entry,” he said.
Hungary will hold the EU’s rotating presidency in the first half
of next year, and Poland in the second half.

Analysts have a mixed view. They agreed the pension reforms
helped the relevant countries’ long-term fiscal outlooks.

But Peter Attard Montalto, an economist at Nomura, said any
review of the Stability and Growth Pact would take years to
complete and no proposal would come into force any time soon.

He also said any move to remove debt and spending from state
balance sheets was not good from a market perspective and cited
Greece, where billions of euros in debt tied to state companies
and the health sector endangered the country’s finances.

“I think this move goes in the wrong direction,” he wrote in
a note. “If anything, more debt … should all be accounted
for.”
(Additional reporting by Krisztina Than in Budapest, Jan
Strupczewski in Brussels and Karolina Slowikowska and Gabriela
Baczynska in Warsaw; writing by Michael Winfrey; editing by
Patrick Graham and Susan Fenton)

WRAPUP 2-EU states seek new budget rule due to pension reform