Hungarian PM Viktor Orban delivers a speech for National Day, in Zalaegerszeg
Hungarian Prime Minister Viktor Orban attends the inauguration of Mindszentyneum during the celebrations of the 66th anniversary of the Hungarian Uprising of 1956, in Zalaegerszeg, Hungary, October 23, 2022. Reuters

The European Commission is likely to approve next week Hungary's post-pandemic recovery plan to keep open the possibility of EU disbursements later, but hold back any payouts until Budapest fulfils all agreed conditions, sources at the EU executive said.

Under the EU recovery scheme, Hungary could get 5.8 billion euros ($6.02 billion) in grants to spend on making the economy greener and more digital - cash Budapest badly needs amid surging inflation, slowing growth and rocketing borrowing costs.

Separately, the Commission is also likely to recommend next week that EU governments suspend 65% of transfers from the EU budget to Hungary, or some 7.5 billion euros, until many of the same conditions as for the recovery fund cash, mainly pertaining to the independence of the judiciary, are met, the sources said.

The Commission's move to withhold 13.3 billion euros in total from Hungary will come after months of negotiations with the government of right-wing Prime Minister Viktor Orban over EU concerns about high level corruption and safeguarding the independence of courts, non-governmental institutions, and media, as well as rights of minorities.

The European Commission sources declined to be named due to the sensitivity of the issue.

Under a deal with the Commission, Hungary was to take action on some of these key concerns by Nov. 19, but officials said that a preliminary assessment showed the steps were insufficient.

Dealing with Hungary's plan to spend the 5.8 billion euros in grants from the EU recovery fund and freezing the 7.5 billion euros for Budapest from the EU's so-called cohesion funds are two separate legal processes. However, they share a common set of conditions that Hungary must meet to get the cash released.

The EU's approval of Budapest's recovery plan is a way to keep open the option of disbursements and therefore pressure on the Orban government to meet the numerous conditions.

Without the approval in 2022, 70% of the recovery fund grants would have been irrevocably lost.

The same logic applies to the recommendation to freeze more than half of the EU's cohesion fund money for Budapest, cash EU countries get to equalise the standards of living across the 27-nation bloc.

Once Hungary addresses the EU's concerns, mainly around dealing with corruption and the independence of the judiciary so that funds from the EU budget are not at risk of being misspent, the disbursements can be unblocked, the sources said.

($1 = 0.9631 euros)

(Editing by John Chalmers and Tomasz Janowski)