TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 2

2........... Situation of risks covered by the Budget.......................................................................... 2

2.1........ Overview of capital loan operations covered by the EU guarantee.................................... 2

2.2........ Risk factors.................................................................................................................... 4

2.3........ Cumulative and annual Budget guarantee exposures......................................................... 4

2.4........ Loan operations covered by the Budget guarantee........................................................... 6

2.5........ Evolution of risk.............................................................................................................. 9

2.5.1..... Situation of loans to Member States................................................................................ 9

2.5.2..... Situation of loans to third countries................................................................................ 10

2.6........ Payment under the Budget guarantees........................................................................... 12

2.6.1..... Borrowing/lending operations........................................................................................ 12

2.6.2..... Guarantees given to third parties.................................................................................... 13

2.6.3..... Default interest penalties for late payment...................................................................... 14

3........... Country-risk evaluation................................................................................................. 15

3.1........ Candidate countries...................................................................................................... 15

3.1.1..... Turkey......................................................................................................................... 15

3.2........ Potential candidate countries......................................................................................... 17

3.2.1..... Serbia.......................................................................................................................... 17

3.3........ Mediterranean partners................................................................................................. 18

3.3.1..... Egypt........................................................................................................................... 18

3.3.2..... Lebanon....................................................................................................................... 20

3.3.3..... Tunisia.......................................................................................................................... 21

3.3.4..... Morocco...................................................................................................................... 22

3.3.5..... Syria............................................................................................................................ 23

3.3.6..... Jordan.......................................................................................................................... 25

3.4........ Other countries............................................................................................................. 26

3.4.1..... South Africa................................................................................................................. 26

3.4.2..... Brazil............................................................................................................................ 27

1. Introduction

This working document is published in parallel with the report from the Commission to the European Parliament and the Council on guarantees covered by the budget at 31 December 2010. It provides information on quantitative aspects of the risk borne by the Budget, relating to third countries and Member States. An overview of the outstanding amount of loans covered by the budget under each programme is presented in section 2. The third countries representing important risks to the Budget in 2010, and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external or debt situation, are included in the country risk evaluation in section 3. The evaluation comprises short analyses and tables of risk indicators. The evaluated countries are grouped in 4 sub-sections: candidate countries (3.1), potential candidate countries (3.2), Mediterranean partners (0) and other countries (3.4).

2. Situation of risks covered by the Budget 2.1. Overview of capital loan operations covered by the EU guarantee

Table A1 shows the outstanding amount and annual repayments of capital and interest in respect of borrowing and lending operations for which the risk is covered by the Budget. The figures show the maximum possible risk for the EU in respect of these operations and must not be read as meaning that these amounts will actually be drawn from the Fund or the Budget.

· Explanatory notes to table (A1)

(a) Authorised ceiling (Table A1)

This is the aggregate of the maximum amounts of capital authorised (ceilings) for each operation decided by the Council or by the European Parliament and the Council.

(b) Capital outstanding (Table A1)

This is the amount of capital still to be repaid on a given date in respect of operations disbursed.

(c) Remainder to be disbursed (Table A1)

Amount of loans signed not yet disbursed at the date of the report.

· EIB operations

· EIB loans operations account for 63% of the total loan operations covered by the budget. The following table provides further details in this respect.

2.2. Risk factors

Factor increasing the risk:

· the interest on the loans must be added to the authorised ceiling.

Factors reducing the risk:

· limitation of the guarantee given to the EIB[1]:

75% of the total amounts of loans signed in the Mediterranean countries based on the Mediterranean protocols of 1977 and Council Regulations 1762/92/EEC and 1763/92/EEC.

70% of the total amounts of loans signed as part of lending operations with certain non‑Member States authorised by Council Decisions 96/723/EC, 97/256/EC, 98/348/EC and 98/729/EC and a sharing of risk between the EU and the EIB as the Budget guarantee covers only political risks in some cases;

65% of the total amounts of loans signed as part of financing operations with certain non‑Member States authorised by Council Decisions 99/786/EC, 2000/24/EC and Decision 2009/633/EC of the European Parliament and of the Council, and a sharing of risk between the EU and the EIB as the Budget guarantee covers only political risks in some cases, as regards the two first-mentioned decisions, and only risks of a political or sovereign nature in the case of the last decision;

· operations already repaid, since the amounts concerned are the maximum amounts of capital authorised (ceilings) and not outstanding amounts;

· the ceilings are not necessarily taken up in full.

Another factor to be considered is that some loans are disbursed in currencies other than the EUR. Due to exchange rate fluctuations, the ceiling may be exceeded when the amounts disbursed up to the date of the report are converted into EUR.

2.3. Cumulative and annual Budget guarantee exposures

With the cash flow approach based on the existing loans disbursed it is possible to calculate the total capital exposure of the budget and the total capital and interest payments due to be received each year. The following table A2 includes the estimated amount of principal and interest due each financial year by each country according to disbursements made until 31 December 2010[2].

2.4. Loan operations covered by the Budget guarantee

The Budget covers two types of lending operations. These are:

(a) Lending operations to Member States. These are BoP, MFA, Euratom, (table A3a) and EIB guaranteed lending operations (table A4).

(b) Lending operations to non Member States are covered by the Guarantee Fund for external actions. These include MFA, Euratom (Table A3b) and EIB guaranteed lending operations to third countries (table A4).

2.5. Evolution of risk

The evolution of risk corresponds to the schedule of the total annual repayments (amount in capital including interests due) under all financial instruments guaranteed by the Budget. The situation of loans to Member States implies that the risk is directly covered by the Budget. Regarding the situation of loans to third countries the risk is covered by the guarantee Fund for external actions.

2.5.1. Situation of loans to Member States

The total risk towards Member States arising from BoP, Euratom, EIB and MFA lending has increased during the second semester 2010.

Two additional tranches for BoP loans were disbursed for a total amount of EUR 1.35 billion (EUR 200 million for Latvia and EUR 1.15 billion for Romania).Further BoP loan disbursements are planned up to 2012.

As regards reimbursements, Hungary will repay in 2011 its first tranche of EUR 2 billion disbursed in December 2008 (included in Graph A1). Two other tranches of EUR 1 billion for Latvia and EUR 2 billion for Hungary, disbursed in 2009, will be reimbursed in 2014. Three additional tranches totalling EUR 4.2 billion disbursed during the second semester 2009 will be reimbursed in 2015 and 2016.

EFSM was activated for Irland in early January with a first disbursment of EUR 5 billion and EUR 3.5 billion in March. Further disbursements are scheduled during the year 2011 up to 2012. At the end of April 2011, Portugal had required lending under this programme. Both countries have not been taken into consideration in the graph A1 below since at 31.12.2010 the relating loan operations were not disbursed.

Graph A1: Total Annual Risk to the Budget[3] relating to Member States at 31.12.2010[4] (EUR million) for the period 2011-2016

2.5.2. Situation of loans to third countries

At 31 December 2010, a total of EUR 3 022 million remained to be disbursed by the EIB under the EUR 20 060 million EIB external lending mandate for 2000 – 2007:

At the same date, an amount of EUR 10 603 million remained to be disbursed out of signatures made under the EIB external mandate for 2007-2013.

Graph A2: Total Annual Risk borne by the Budget related to third countries (EUR million) at 31.12.2010 for the period 2011-2016

Graph A3 presents the result of simulations aiming at estimating the outstanding amount covered by the Fund for the period 2011 to 2016. These simulations are based on disbursement scenarios under the mandates preceding the current EIB external mandate, as well as under the current mandate, established for the period 1 February 2007—31 October 2011 by Decision No 633/2009/EC of the European Parliament and of the Council.

The rhythm of disbursements has a strong impact on the amount of the provisioning of the Fund in future years. The simulation is therefore subject to a non-negligible degree of uncertainty.

Graph A3: Estimated outstanding amount covered by the Fund from 2011 to 2016 (EUR million).

2.6. Payment under the Budget guarantees

The EU borrows on the financial market and on‑lends the proceeds (back-to-back) to Member States (balance of payments), third countries (macro-financial assistance) or utility companies (Euratom).

Procedures have been set up to guarantee the repayments of the borrowings due from the EU and also the guarantees given to third parties in connection with the EIB lending operations.

2.6.1. Borrowing/lending operations

The loan repayments are scheduled to match the repayments of the borrowings due from the EU. If the recipient of the loan is in default, the Commission will first draw on its own cash resources to ensure a timely repayment of the EU borrowing on the contractual due date.

Should the amounts needed for the necessary cash coverage exceed, in a certain period or date, the available Commission's treasury balances, the Commission would, in accordance with Article 12 of Council Regulation 1150/2000[5], draw on additional cash resources from the Member States in order to fulfil its legal obligations towards its lenders.

In the case of BoP loans, where reimbursed amounts can be very high, the beneficiary Member States are requested to deposit the amounts due at the European Central Bank seven business days in advance of the contractual due date. This gives enough time for the Commission and Member States to provide for the cash advance to ensure timely repayment in case of default.

In a second step, the treasury situation would be regularised as follows:

Euratom and MFA loans

a) if the payment delay reaches three months after the due date, the Commission draws on the Fund to cover for the default and obtain the necessary funds to replenish its treasury.

b) the Commission might also need to draw on the Budget, most likely by means of a transfer, to provide the corresponding Budget line under article "01 04 01 European Union guarantees for Union and Euratom borrowing operations and for EIB lending operations" with the necessary appropriations needed to cover the default. This method is used when there are insufficient appropriations in the Fund or if the borrower is a Member State[6] and the transfers are likely to require advance authorisation by the budgetary authority.

c) by the re-use of recovered funds, if any.

Balance of Payments (BoP) loans

a) by the re-use of funds from late payments

b) the Commission may also need to propose a transfer or an Amending Budget to budget the cash advance under the corresponding budget line "01 04 01 01 European Union guarantee for Union borrowings for balance-of-payments support.

2.6.2. Guarantees given to third parties

The EU provides a guarantee in respect of financing granted by the EIB under the external mandates. When the recipient of a guaranteed loan fails to make a payment on the due date, the EIB asks the Commission to pay the amounts owed by the defaulting entity in accordance with the relevant guarantee agreement.

The guarantee call must be paid within three months of receiving the EIB's request, either from the Fund[7] or directly from the Budget should the resources of the Fund be insufficient[8].

The EIB administers the loan with all the care required by good banking practice and is obliged to seek the recovery of the payments due after the guarantee has been activated.

2.6.3. Default interest penalties for late payment

(a) EU or Euratom loans

For loans granted by the EU or Euratom, default interest is owed by loan beneficiaries for the time between the date on which cash resources are made available by the Budget and the date of repayment to the Budget.

(b) EIB loans

For EIB loans, EIB is entitled to default interest which is calculated during the period between the due date of a defaulted loan instalment and the date of receipt of the cash resources by the EIB from the Commission. From the latter date, default interest is due to the Commission.

3. Country-risk evaluation

Third countries representing important risks to the Budget in 2010, and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external or debt situation, are included in the country risk evaluation.

The evaluation presented below comprises short analyses and tables of risk indicators. The evaluated countries are grouped in 4 sub-sections: candidate countries (3.1), potential candidate countries (3.2), Mediterranean partners (0) and other countries (3.4).

Explanatory notes for country-risk indicators

Abbreviations and English words used in tables

S&P || Standard and Poor's

FDI || Foreign Direct Investment

GDP || Gross Domestic Product

CPI || Consumer Price Index

est. || Estimates

m EUR || EUR million

bn USD || USD billion

n.a. || not available

Standard footnotes used in the table

1) Includes only EU and EIB loans (outstanding disbursements) to CEEC, NIS and MED.

2) The higher the ranking number, the lower the creditworthiness of the country. Countries are rated on a scale of zero to 185; 185 represents the highest risk of default. A given country may improve its rating and still fall in the ranking if the average global rating for all rated countries improves.

3.1. Candidate countries 3.1.1. Turkey

The Turkish economy has recovered strongly, and grew by 8% in 2010 after a contraction by 4.7% in 2009. A double-digit growth of imports combined with a domestic credit boom accommodated rising private consumption and in particular investment. Headline inflation eased after reaching 10% in early 2010 and came down to 6.5% by the end of the year. On the back of the strong GDP growth, the fiscal deficit has narrowed to about 3.5% of GDP in 2010, and the ratio of public debt stock to GDP has come down by almost 4 percentage points in the previous year and amounted to 41% at the end of 2010. The current account deficit tripled in 2010 as imports increased by more than 15% in volume terms and the terms of trade worsened on higher oil and commodity prices. FDI inflows fell marginally to about 1% of GDP. Turkey's gross external debt declined by about 5% of GDP in 2010 and currently amounts to about 38% of GDP. Private external debt represents two thirds of the total debt and showed a similar decline. International reserves fell by about 3% to EUR 80 billion, covering about 4 months of imports. Largely as a result of the improved risk-appetite for emerging markets, the domestic currency appreciated against the USD and the EURO, in particular in the first three quarters of 2010.

3.2. Potential candidate countries 3.2.1. Serbia

Following a 3% drop of output in real terms in 2009, Serbia's economy began to slowly recover in 2010. The economic upturn in 2010 was broad-based, driven by foreign demand in the first half of the year while domestic consumption and investment began to pick up towards the end of the year. Vigorous export activity, supported by the gradual economic revival in Serbia's main trading partners, and the dinar depreciation, helped to narrow the current account deficit further, well below the pre-crisis level. However, the deficit of the income account was by a third higher and the surplus of the current transfers account slightly lower than a year ago. Financial and capital flows remained modest, with FDI and other investment markedly lower in comparison with 2009. Foreign exchange reserves of the National Bank of Serbia remained largely stable at over EUR 10 billion, covering some 8 months of imports. Foreign currency inflows have been insufficient to cover the current account deficit and Serbia’s foreign debt continued to increase. In 2010 gross external debt rose by almost EUR 1.3 billion, to around EUR 23.8 billion, i.e. close to 80% of GDP. Renewed inflationary pressures became a key policy concern. At end-December, inflation soared to 10.3% year-on-year (6.6% in 2009), overshooting the 6% ± 2% target range set by the National Bank of Serbia. In 2010, public finances deteriorated as the fiscal policy allowed automatic stabilisers to operate. While revenue performance improved in the second half of the year as economic activity was picking up, a supplementary budget was nevertheless adopted in November. At 4.8% of GDP, the deficit is the highest in the past decade. Public debt increased in 2010 to over 41% of GDP, mostly in the form of foreign loans.

3.3. Mediterranean partners 3.3.1. Egypt

The Egyptian economy gathered momentum in 2010 with GDP growing by 5.1%, up from 4.7% in 2009. Growth was mainly driven by domestic demand. Private consumption continued to grow strongly helped by falling inflation and supported by three government stimulus packages which also contributed to an increase in gross fixed investment following a sharp decline in 2009. The external side of the economy remained weak with both exports and imports falling compared to the previous year. Exports suffered from weak consumer demand in Egypt's main trading partners, in particular the EU and the USA. The current account remained in deficit at -1.5% of GDP. Compared to the situation before the crisis when it was regularly in surplus, the current account is still weighed down by lower revenues from tourism and the Suez Canal, weaker remittances and only a tentative pick-up in FDI inflows. Inflation (CPI) continued to decrease to 11% in 2010, having fallen from 18.3% in 2008. The general government balance expanded to -8% of GDP in 2010 from -6.6% of GDP in 2009 linked to government stimulus measures.

The domestic political crisis starting in the spring of 2011 will cause short-term disruption to the Egyptian economy. On the domestic side, strikes involving numerous sectors of activity and the damage caused to governments buildings and property will have a negative impact. On the external side, there has been a sharp fall in tourism revenue, early indications of a decline in capital inflows, including FDI, and lower remittances as a result of the conflict in Libya where many Egyptians are employed. Output growth in 2011 is set to be significantly lower than in 2010, although the economy is expected to continue to grow, and the political and economic outlook remains highly uncertain. The general government deficit is set to expand further on account of higher public spending. Economic reforms are likely to be put on hold until promised elections are held in 2011 as the interim government focuses on maintaining stability.

3.3.2. Lebanon

Lebanon’s economy performed remarkably well during the global financial crisis with real GDP growing by 8% in 2010 from nearly 7% in 2009, backed by buoyant activity in construction, tourism, commerce, and financial services. Consumer price inflation increased to 4.7% in 2010 from nearly 1.2% in 2009, driven partly by fuel and commodity price increases. The country also experienced a significant inflow of foreign capital during 2010, which helped the Central bank rebuild its foreign exchange reserves. The government deficit widened to 8.7% in 2010 from 8.1% in 2009 and the current account balance improved slightly partly due to a moderate increase in FDI inflows. The external debt-to-GDP ratio went down to 160% from almost 170% in 2009 but it remains the highest in the world; almost half of it is denominated in foreign currencies. However, little progress has been made on structural reforms regarding the loss-making electricity sector, the value added tax (VAT) rate, elimination of extra-budgetary funds, or the improvement of the budget process. Lowering the government debt-to-GDP ratio and alleviating the pressure on public finances still remain the top medium-term priorities; they require expenditure rationalization and socially balanced tax measures. The banking sector is characterized by prudent regulations and supervision; however it depends heavily on short-term deposit inflows from non-residents. Lebanon continues to suffer from high underlying vulnerabilities fed by the maintenance of a fragile political system and regional tensions.

3.3.3. Tunisia

Tunisia showed remarkable resilience to the global economic crisis during 2010 with real GDP growth reaching 3.8% from 3.0% in 2009, supported by a rebound in industrial activity and investment. The budget deficit (excluding grants and privatization) stabilized at 3% of GDP and the current account deficit narrowed to 2.2% from 3.1% in 2009. However, Tunisia's official reserves had fallen to EUR 7.2 billion by the end of 2010 (corresponding to 6 months of imports of goods and services) partly reflecting seasonal factors, but remaining at a comfortable level. Public debt remained stable, corresponding to 11.4 months of exports of goods. Unemployment increased only marginally but concerns mainly young educated people. Inflation reached 4.5% from 3.5% in the previous year, due to rising food prices. Low dependence on external financing and a significant growth on deposits enabled to good functioning of the banking sector during 2010. Tunisia has made great progress in macroeconomic reforms with the implementation of new tax system establishing public spending controls (including subsidies) units. These reforms are expected to reduce the debt-to-GDP ratio below 40% and the government deficit to 2% by 2015.

Despite the robustness of the Tunisian economy to global factors, the recently unfolding political crisis of the country and the developments in Libya has turned into a major source of destabilisation. The budget deficit is expected to rise in 2011 in light of the deceleration of growth. The current account deficit is also expected to grow in 2011 due to the decline in tourism revenues, FDI inflows and remittances, and the increase in oil and commodity prices.

3.3.4. Morocco

The Moroccan economy grew by 3.2% in 2010, compared to 4.8% in 2009. The slowdown is mainly due to the weak growth in agriculture. FDI inflows increased by an estimated 1.5% compared to 2009 and are likely to recover only gradually. Inflation picked-up slightly due to higher food and fuel prices but these increases have been partly absorbed by the government subsidies. The fiscal deficit expanded in 2010 to 4% of GDP from 2.1% in 2009. On the revenue side, indirect taxes and customs duties rebounded after having fallen sharply in 2009. On the expenditure side food and fuel subsidies rose to around 2% of GDP. The level of debt increased slightly to 58.5% of GDP from 57% of GDP in 2009. Higher commodity prices contributed to an increase of the current account deficit which rose from 5.8% of GDP in 2010. Average inflation in 2010 was 1.4%, up from 1% in 2009, while government subsidies will help contain further price rises. Despite the slight increase in inflationary pressure, the Bank al-Maghrib (BAM) chose not to tighten monetary policy and maintained its policy rate at 3.25%. In March 2010, the BAM also lowered reserve requirements from 8% to 6%. In a sign of growing international confidence, Morocco was assigned investment grade status by Standard and Poor's Rating Agency in March 2010. In September, the government also issued the first government bonds on the international market for three years, EUR 1 billion in ten-year Eurobonds, which were oversubscribed and mainly purchased by European and US investors. Foreign reserves increased slightly in 2010, representing about 6 months of imports, to nearly the level of external debt which stands at 23% of GDP.

3.3.5. Syria

The Syrian economy recovered in 2010 with GDP growth reaching 3.2% despite a fourth consecutive poor harvest and the stagnation of oil production. Economic activity has been largely supported by the fiscal policy adopted by the government in order to mitigate the effects of the crisis. The services balance contributed to a reduction in the current account deficit to 3.9% of GDP from 4.5% in 2009. At the end of 2010, foreign exchange reserves covered 13 months of imports reflecting the quite robust financial situation of the country.

Since March 2011, Syria has been facing popular protests in the context of spreading unrest against authoritarian regimes of the region. The government's reaction has been a mixture of concession and repression. The political situation will have significant negative consequences for the Syrian economy with a growth forecast of only 1.1% for 2011. The unrest halted the implementation of reforms, such as the reorganisation of the public sector and the introduction of VAT. The strong increase in wages in the public sector (up to 62%) and the reintroduction of subsidies decided by the government will have a strong negative impact on the state budget by pushing up the deficit to an estimated 7.7% of GDP. The increase in minimum salaries in the private sector, comparable to the one in the public sector, is expected to cause a strong rise in unemployment. Also, inflation will surge. The Syrian pound has slipped about 15% against the dollar since April obliging the Central bank of Syria to bring back restrictions on foreign- currency transactions. The closure of borders with surrounding countries, combined with the sanctions decided by the international community in response to repressive government policy, will offset the efforts that have been made to diversify the economy. Foreign investment is expected to drop and tourism sector is faced with a major decline, due to fewer visitors especially from Western countries. The foreign reserves accumulated during the previous years, combined with higher revenues than expected from oil exports, gave Syrian authorities the possibility to compensate the loss of revenues due to the slowdown of activity. If the unrest continues, Syria will be facing a recession, or even a risk of bankruptcy, obliging national authorities to negotiate financial assistance with regional allies.

3.3.6. Jordan

The global economic crisis affected economic activity in Jordan during 2010 with real GDP growing by less than 3% compared to 5.6% in 2008. The recent slowdown is partly attributed to decreased FDI inflows from surrounding Arab states. Despite the economic slowdown and the increase in international fuel and food prices, unemployment decreased slightly during 2010 and reached 2008 levels of almost 12.5% of total labour force. Inflation decreased to 5.7% from 6.7% in 2009. The government deficit narrowed to 8.4% of GDP in 2010 from 12.9% in 2009, mainly due to reductions in the operational cost of Ministries, a hiring freeze for civil servants and greater prioritization of capital spending. In response to fiscal consolidation measures, public debt-to-GDP ratio declined to about 25% from almost 32% and the current account deficit narrowed to 4.3% in 2010 from 6.8% in 2009. Following the successful first-time issuance of a USD 750 million five-year Eurobond in November 2010 external reserves increased to USD 12.6 billion in 2010, representing 11.5 months of next year’s exports of goods and services.

Jordan has made remarkable progress in structural reforms and capacity-building, such as strengthening the legal framework for public-private partnerships (PPP) and promoting draft regulations to lower the cost of credit. Economic growth is set to increase steadily in the medium-term as exports and investment recover, but the near-term outlook is subject to uncertainty related to world commodity price developments, the growth path of the Gulf countries to which Jordan’s business cycle is closely linked and possible spillover of the political instability in the Arab world.

3.4. Other countries 3.4.1. South Africa

Following a contraction by 1.8% of GDP in 2009, South Africa's economy has been recovering strongly in 2010 and real GDP grew by 2.8%. High commodity prices, low interest rates, and faster global growth, have been the main drivers of South Africa's economic recovery. Improving household consumption and accelerating investment will support an increase in economic growth over the medium term. South Africa relies on exports, concentrated primarily on commodities, which have been pushed up by stronger external demand and supported by the depreciation of the Rand. After running a budget deficit of an estimated 5.3% of GDP in the current 2010/11 fiscal year, national authorities project the shortfall to remain the same in 2011/12 (instead of previously forecasted deficit of 4.6% of GDP). Monetary policy is focused on trying to keep annual inflation within the official target range of 3-6%. The financial sector weathered the global financial crisis quite well. During 2010 South Africa received net inflows of 92 billion ZAR (i.e. 13.3 billion USD) in foreign capital, which contributed to upward pressure on the exchange rate. Since the fourth quarter of 2010, however, South Africa has experienced capital outflows. Along with uncertainties and volatility in global financial markets, this contributed to a depreciation of the rand. The current account deficit, which had reached more than 7% of GDP in 2007 and 2008, has returned to 4% in 2009 and is expected to stand at 3.2% of GDP in 2010. Foreign exchange reserves rose from USD 34.1 billion in 2008 to an expected USD 43.8 billion in 2010. External debt is rising from a low level, but is expected to be financed by capital inflows.

3.4.2. Brazil

Brazil recovered strongly from the crisis and grew at a record rate of 7.5% in 2010 driven mainly by strong domestic demand. Growth is expected to slow to 4.5-5% in 2011. The output gap is currently positive and unemployment is at an historical low. Inflationary pressures have been mounting since the beginning of 2011, reflecting not only higher international food prices but also internal factors. Inflation reached 6% in February (year-to year) compared to a midpoint target of 4.5%, but still remains within the limits of the upper band of 6.5%. The Brazilian Central Bank continued to tighten its policy, as it started at the end of 2010, by raising the SELIC twice this year up to 11.75% and introducing macro-prudential measures. Further increases in the policy rate are expected and the Brazilian Central Bank signalled its readiness to introduce additional macro-prudential measures if necessary. On the fiscal side, the government announced spending cuts worth USD 30 billion (around 1.3% of GDP) in the 2010 budget, ending the 2009 fiscal stimulus. The debt-to-GDP ratio declined from 42.8% in 2009 to 40.4% in 2010 and the Brazilian Ministry of Finance expects that the tendency will continue in 2011.

National currency continued to appreciate, due to strong capital inflows: Brazil has been one of the top recipients of capital inflows (USD 92 billion in 2009 and around USD141 billion in the first 11 months of 2010), and one of the top beneficiaries of the improvement in the terms of trade. The authorities have tried to contain the appreciation of the real through sterilized interventions in the foreign exchange markets that have pushed international reserves to a record level. Meanwhile imports grew at a record 36.2% in 2010, supported by the strong exchange rate as well as by the dynamism of the domestic demand. As a result, the current account deficit reached 2.3% of GDP in 2010 and is expected to widen in 2011.

[1] Within each portfolio individual EIB loans are, de facto, guaranteed at 100% until the global ceiling is reached.

[2] For the purpose of this calculation, it is assumed that defaulting loans are not accelerated, i.e. only due payments are taken into account.

[3] Based on the amounts (capital and interest) due under operations disbursed at 31.12.2010.

[4] As of 31 December 2010, the 2011 annual risk for Member States was EUR 1,756 million.

[5] Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 (OJ L 130, 31.5.2000, p.1-12) implementing Council Decision 2007/436/EC, Euratom of 7 June 2007 on the system of European Communities' own resources (OJ L 163, 23.6.2007, p. 17-21). [the regulation of 2000 implements a decision of 2007?]

[6] The loans (and loans guarantees) to accession countries were covered by the Guarantee Fund until the date of accession. From that date, those that remained outstanding ceased to be external actions of the Union and are therefore covered directly by the Budget.

[7] Since the entry into force of the Regulation establishing the Guarantee Fund for external actions, the Agreement between the EU and the EIB on the management of the Fund foresees that the Commission must authorise the Bank to withdraw the corresponding amounts from the Fund within three months from the date the EIB calls in the guarantee. Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 establishing a Guarantee Fund for external actions (codified version), the "Guarantee Fund Regulation" (OJ L 145, 10.6.2009, p.10).

[8] If there are insufficient resources in the Fund, the procedure for activating the guarantee is the same as for borrowing/lending operations, see 2.6.1 above.