EXPLANATORY MEMORANDUM

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

The Commission has been conducting borrowing and lending operations to provide financial assistance in the form of loans to a beneficiary country for several decades. The borrowing and lending operations are guaranteed under the Union’s budget and come under the wider scope of budgetary implementation. General rules for such operations are laid down in Article 220 of Regulation (EU, Euratom) 2018/1046 (“Financial Regulation”), which provides that the Commission can be empowered in a basic act to borrow on behalf of the Union or Euratom to on-lend the corresponding amounts to the beneficiary Member States or third countries under the conditions applicable to the borrowings. The cash flows between the borrowed funds and the loans are matched one-to-one. This means that market operations are based on disbursement needs, which limits the possibility to plan various borrowing operations coherently with the best market opportunities and structure maturities to achieve the best costs.

The funding needs for Ukraine require mobilisation and disbursement in a cost-effective flexible and financially sound manner, integrating all funding needs including for NextGenerationEU (“NGEU”). It is of paramount importance that this funding be organised under a single funding method in order to allow different policy needs to be met concurrently. To that end, it is necessary to amend Regulation (EU, Euratom) 2018/1046 to establish the diversified funding strategy, currently implemented for borrowings under Decision (EU, Euratom) 2020/2053 as the baseline method for the implementation of borrowing operations. This strategy has allowed the successful mobilisation of funds for non-repayable support and loans under Regulation (EU) 2021/241 and a range of other EU policies in 2022.

This will allow the Commission to finance the assistance to Ukraine under the proposed Regulation establishing an instrument to provide support to Ukraine in a cost-efficient, flexible and financially sound manner to ensure parallel financing of all Union programmes relying on borrowing. The extension of the scope of application of the diversified funding strategy goes beyond the funding needs for Ukraine and would be available to any future programmes. It will enable the Commission to use the infrastructure, which allows an integrated funding planning and communication to markets.

In the absence of such a single funding method, the Commission would be required to continue financing different programmes of financial assistance separately. This would create cost and complexity as the different programmes of financial assistance would compete for a limited number of funding opportunities. It would fragment the supply of Union’s debt and reduce liquidity and investor interest in the separate programmes. Financing all financial assistance through a single funding method would therefore enhance the liquidity of the Union’s bonds their attractiveness and cost-effectiveness.

The diversified funding strategy is a financing method through which funding transactions are organised in a manner consistent with the limits of financial liability authorised in the basic acts in order to achieve the policy objectives. The implementation of a diversified funding strategy does not change the financial liabilities arising from the borrowing. It provides the Commission with more flexibility in how the Union mobilises resources through bond issuance.

Recourse to a diversified funding strategy as a single funding method will allow the Commission to decouple the timing and the maturity of single funding transactions from the disbursements to beneficiaries. A common liquidity pool financed by the issuance of short-term funding (EU-bills) enables the Commission to organise payments in accordance with a regular and agreed schedule, independently of the exact timing of the long-term bond issuance. This then allows payments to be made to beneficiaries independently of market conditions prevailing at the time of the disbursement, and avoids having to raise fixed amounts in volatile or adverse conditions. Over the lifetime of the programme of financial assistance, the net liabilities generated are fully matched by countervailing assets (amounts outstanding, still to be repaid under loans as they mature). On this basis, the principles of budgetary neutrality and budgetary balance as set out in Article 310(1) TFEU are respected. The costs are fully borne by the beneficiaries based on a single cost allocation methodology that ensures transparent and proportional allocation of costs. The repayment obligations should remain with the beneficiaries of the financial assistance, in compliance with Article 220(5)(e) of the Financial Regulation.

The common liquidity pool should be maintained at levels that would allow the Commission to meet all expected outflows over the short-term, based on a robust liquidity forecasting capacity. The existence of a large, well-stocked liquidity buffer, capable of managing disbursements over long periods, allows the diversified funding strategy to function without the need for other solutions to address temporary cash shortfalls.

To support the most successful implementation of the diversified funding strategy, the Commission should, as far as possible, ensure a continuous market presence and to this end implement all necessary transactions aiming at achieving the best possible funding costs and at facilitating of transactions in debt securities of the Union and Euratom. The latter is crucial in supporting the active involvement of the widest range of investors to markets for Union’s debt instruments.

The conduct of the diversified funding strategy requires that a single set of rules is followed in respect of all borrowing and lending programmes which rely on it. The Financial Regulation in its role of a single rulebook for the implementation of the EU budget should provide the basis for those rules.

Following the entry into force of this amendment of the Financial Regulation, the Commission will adopt and implement a wider governance framework, risk management procedures, and cost allocation methodology.