COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 26.07.1995 
COM(95) 404 final 
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 
LIMITS IMPOSED BY THE GUARANTEE FUND MECHANISM ON 
COMMUNITY LOANS AND LOAN GUARANTEES 
IN RESPECT OF THIRD COUNTRIES 

î. INTRODUCTION 
The Guarantee Fund has been in existence on a legal basis since 
31 October 1994.' Payments into the Fund are drawn from the guarantee reserve, 
representing the amount of provisions made on new loan and loan guarantee 
operations outside the Community. The annual amount of the reserve is entered 
in the financial perspective and represents a constraint which indirectly limits the 
Community's loan and loan guarantee capacity in respect of third countries. 
This constraint is such that if the amount of the reserve and the guarantee 
mechanism remain unchanged, it would be impossible simply to renew the EIB's 
multiannual loan allocations at their present level while maintaining a minimum 
macro-financial assistance capacity. The European Council meeting in Cannes 
confirmed the Union's intention of strengthening its financial cooperation with 
partner third countries, in particular the central and east European countries 
(CEECs) and the Mediterranean countries (MED). The European Council also 
agreed to increase the appropriations for direct budget aid which the Community 
provides for these countries. This communication explores the various options for 
reconciling the objectives which the Union might wish to adopt with regard to 
loans to third countries with the budget discipline imposed by the guarantee 
mechanism established to protect the Community budget from possible default by 
its debtors. 
The Commission also recently presented the report the Council had requested 
concerning the advisability of reducing the extent of the guarantee granted in 
respect of EIB loans to third countries. In the next few months, the Commission 
intends to propose the renewal of guarantees on allocations for EIB loans 
mobilized in respect of third countries. These proposals will take account of the 
conclusions which the Council might wish to draw on the basis of the present 
communication and of the report on guarantees in respect of EIB loans. 
2. THE DISCIPLINE IMPOSED BY THE GUARANTEE MECHANISM 
In the main, the action covered by the Guarantee Fund mechanism consists of: 
operations guaranteeing EIB loans outside the Community; 
Euratom operations outside the Community; 
loans for macrofmancial assistance to third countries. 
The Community's macrofmancial assistance to third countries is of a one-off, 
exceptional nature and is liable to vary considerably, up or down, from one year 
to the next. On the other hand, EIB and Euratom loan decisions are necessarily 
reflected in multiannual commitments. The EIB and Euratom loans taken into 
account in the provisioning of the Guarantee Fund are determined on the basis of 
Council Regulation (EC, EURATOM) No 2728/94 of 31 October 1994, 
OJ No L 293, 12 11.1994. 
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scheduled signatures of such loans, as shown in the financial statements attached 
to Council Decisions. 
The Guarantee Fund is provisioned only for operations decided by the Council 
after 1 January 1993. Much of the EIB's present lending activity to third countries 
(the bulk of the commitments in the Mediterranean) stems from the 
implementation of allocations approved prior to 1 January 1993. For this reason, 
the provisioning basis should broaden from 1997, when allocations for EIB loans 
to Mediterranean third countries will have to be renewed. The volume of 
operations covered by the provisioning mechanism will therefore automatically 
will be substantially increased from 1997. 
The constraint imposed by the guarantee mechanism which would then cover all 
the lending and guarantee activities in relation to third countries will be such that 
it seems impossible simply to maintain operations at their present level. The 
volume of loans authorized by the guarantee mechanism is between 
ECU 2 300 million and ECU 2 500 million a year whereas the expected volume 
of loan and guarantee operations, without envisaging any increase in the 
allocations, should be between ECU 2 800 million and ECU 3 100 million a year. 
If none of the present rules is changed, there will be a shortfall equivalent to some 
ECU 600 million a year in the lending capacity required in order simply to 
maintain the financial allocations at their present level beyond 1996. Before these 
allocations are renewed in any way, choices will therefore have to be made so as 
to ensure that the Community's external financial commitments are compatible 
with the discipline imposed by the guarantee mechanism. 
Here, there are four variables to be taken into consideration: 
(i) The amount of financial commitments for loans and loan guarantees 
These commitments were of the order of ECU 2 300 million in 1994, 
ECU 585 million of which were for macrofmancial assistance measures, 
while some ECU 1 700 million related to the EIB's external lending 
activities. This amount is determined by individual loan decisions (e.g. 
macrofmancial assistance to the Ukraine), individual loan guarantee 
decisions (e.g. EIB loan to South Africa), and decisions on guarantee 
allocations (e.g. EIB allocations for CEECs). 
(ii) The amount of the budi*et reserve for guarantees from which payments are 
made into the Guarantee Fund 
This reserve is entered into the financial perspective to 1999. It is 
ECU 323 million in 1995.and will rise to ECU 356 million in 1999. The 
reserve allows a lending capacity of ECU 2 200 million or so in 1995, 
which could rise to ECU 2 500 million or so in 1999.2 
See Annex 2, Table A. 
-3 -
(ih) The rate of coverage of the guarantee granted by the Community budget 
for EIB loans 
This rate is currently 100% for all loans signed, except loans to 
Mediterranean third countries, which are covered by a blanket guarantee 
of 75% of the outstanding amount. 
(iv) The provisioning rate of the Guarantee Fund 
This was 14% when the guarantee mechanism came into force at the end 
of 1994. Because the Guarantee Fund was activated to cover defaults, this 
rate rose to 15% at the beginning of 1995 for all new operations, under the 
terms of the Fund Regulation. Also according to the Regulation, the rate 
is to be reviewed when the Guarantee Fund reaches 10% of the guaranteed 
outstanding amount, and in any case no later than 1999. 
3. POSSIBLE OPTIONS 
3.1 No change in the guarantee mechanism. No change in the guarantee 
reserve. Lending and guarantee operations are adjusted downward. 
This option consists of adjusting our loan and guarantee operations to the lending 
capacity authorized by the guarantee reserve and the guarantee mechanism in 
force. Given the multiannual measures already approved or in the course of 
adoption (e.g. Euratom, EIB loans to South Africa or Turkey), the real capacity 
for new loans and guarantees is only ECU 1 800 million in 1997. This is not 
enough to renew the EIB's multiannual allocations at the present nominal level 
(i.e. approximately, each year, ECU 250 million for the developing countries in 
Latin America and Asia (DCLAA), ECU 1000 million for the CEECs, 
ECU 620 million for the MED countries, ECU 150 million for South Africa)'. 
This capacity is even less adequate in view of the need to allow for a loan 
capacity for macrofmancial assistance operations, which are not multiannual, and 
which would thus be ruled out since there would be no balance available out of 
the guarantee reserve. 
3.2 Increasing (lie loan and guarantee capacity by increasing the budget 
reserve for guarantees. 
This option consists of softening the budget constraint by adjusting budget funds 
in line with the objectives which the Union might adopt in this area. This choice 
means that the financial perspective to 1999 would have to be revised. 
Such a renewal in nominal terms would actually mean a slow decrease in real 
terms. On the residual loans capacity, see Annex 1. 
3 
- 4 -
An increase in the reserve of the order of ECU 100 million would enable EIB 
operations and macrofmancial assistance to be maintained at their present level. 
On the hypothesis that the Union wished to increase the allocations for EIB loans 
to CEECs and to the MED countries by an amount comparable for instance to the 
increase agreed at the Cannes European Council for budget appropriations in 
favour of these countries, this would mean multiannual allocations for loans 
Qi some ECU 350 million a year for the DCLAA, ECU 1000 million a 
year for the MED countries and ECU 1 500 million a year for the CEECs (this 
apportionment would be in line with the equilibrium of budget funds approved at 
Cannes between the CEECs and the MED countries). In order to attain this target 
while maintaining a reasonable margin of manoeuvre (some ECU 700 million per 
year) for macro-financial assistance the guarantee reserve would have to be 
increased by some ECU 220 million a year from 1997. 
3.3 No change in the reserve. Increase in the loan and guarantee capacity 
by changing the guarantee rate on EIB operations 
This option is specifically assessed in the report which the Commission recently 
presented at the Council's request. One of the points taken into account by the 
assessment is the wish to limit the Community budget's exposure and the need to 
keep the Bank's credit rating intact, so as to guarantee that it has access to the 
financial markets on the most favourable terms. 
Except for the MED countries where the rate of guarantee is 75% of the 
outstanding amount, the rate is now 100% of the outstanding amount by region 
(CEECs, DCLAA, South Africa), and could be brought down. 
Assuming that the rate of guarantee is reduced to 75% for all the EIB's external 
operations, and on the basis oï~ maintaining macrofmancial assistance at its 1994 
level, the capacity for new EIB loans would increase by some ECU 400 million, 
from ECU 1 200 million to ECU 1 600 million or so in 1997.4 Unless the 
Community's capacity for macrofmancial assistance is reduced further, this amount 
is insufficient to renew the EIB's loan allocations at their-,present level. 
This option is with all the more reason insufficient to allow the proposed increase 
in the multiannual allocations for EIB loans, in line with the budget appropriations 
agreed at the Cannes European Council. 
See Table, Annex 1. 
4 
- 5 -
3.4 No change in the reserve. Increase in the loan and guarantee capacity by 
reducing the provisioning rate 
The Guarantee Fund Regulation foresees that, when the amount of the Fund reaches the 
target amount of 10% of the outstanding amount, the provisioning rate will be reviewed. 
It would then be consistent to reduce this rate, presently 15%, down to 10%. 
The Guarantee Fund would reach its target amount by the end of 1997 if no substantial 
defaults arise meanwhile. Possible defaults could however delay a revision of the 
provisioning rate. 
Any change of the provisioning rate before 1999, and before the Fund reaches its target 
amount, requires a modification of the Regulation. 
Reducing the provisioning rate from 15% to 12% is insufficient to renew EIB allocations 
at their present level while maintaining macrofmancial assistance at a level close to that 
of 1994, unless it is assumed that the guarantee on EIB operations is at the same time 
reduced to 75% (see Annex 2, Table B). However, reducing the provisioning rate to 12% 
is not sufficient to increase the multiannual allocations for EIB loans, in line with the 
budget appropriations agreed at Cannes, even if the rate of guarantee of EIB operations 
is reduced to 75%. 
If the provisioning rate on new operations is reduced to 10%o, it will be possible to renew 
the EIB multiannual allocations at their present level while maintaining our capacity for 
macrofmancial assistance, and to increase the allocations in the proportions envisaged at 
Cannes for budget appropriations, provided the guarantee rate for the EIB is cut to 75% 
(see Annex 2, Table C). 
However, the disadvantages of such changes in the provisioning rate are that the 
Guarantee Fund will be established more slowly (especially if it is required to cover large 
defaults), and the date at which the target amount of the Guarantee Fund (10% of the 
guaranteed outstanding amount) could be attained will be postponed by several years. 
Moreover, slowing the establishment of the Fund increases the risk of falling below 50% 
of the target amount in case of significant defaults. In such a case, if the exceptional 
refinancing measures envisaged in the Regulation consist of drawing on the reserve for 
guarantees, then the expected outcome pursued by reducing the provisioning rate could 
be neutralized. 
ANNEX 1 CAPACITY FOR LOANS AND LOAN GUARANTEES TO THIRD COUNTRIES 
ALLOWED FOR BY THE GUARANTEE FUND MECHANISM 
as of 7.6.1995 
mio ECU 
1. Reserve 1994 1995 1996 1997 
318 323 326 336 1998 1999 
346 356 
2. Scheduled 
3. Margin - operations (a) 
- provisioning (b) 
4, Capacity for new loans 1818 
254.52 
24.28 
n 1827 
260.5 
62.50 
417 1893 
269.25 
56.75 
378 452 
65.88 
270.13 
1801 375 
54.25 
291.75 
1945 412 
58.88 
297.15 
1981 
*N 5. 1994 level of operations 
- macro-financial assistance 
- EIB 1994 external operations signatures 2341 
585 
1756 
•Scenario 
6. Provisioning assuming 
macro-financial assistance at 1994 level 
7. Reserve headroom for additional EIB operations (3-6) 
8. Potential EIB loans 
- guaranteed at 100% 
- guaranteed at 75% 38.25 
24.25 
162 
216 87.75 
(c) 
0 87.75 
182 
1216 
1621 87.75 87.75 
204 
1360 
1813 209 
1396 
1861 
(a) On the basis of operations decided, proposea and under preparation. 
Includes provisioning on the Euratom loans on the basis of scneduied signatures until 1999. Excludes EIB envelopes in the 
Mediterranean, which arc not presently subject lo provisioning (approved before the 1.1.1993). 
(b) 14% rate for operations approved between 1.1.1993 ana 1.1.1995. 15% rate for operations as from 1.1.1995 
iz: In 1996 the reserve would not allow for the assumed macro-financial assistance level. 
!') Revisions on 1993 operations have also been deducted from tne 1994 reserve. 
ANNEX 2 
TABLE A Implementation of the Guarantee Fund Mechanism 
Low hypothesis 
ECU million 
Reserve 
EIB commitments 
MED 
CEECs 
ALA 
South AF. 
Total EIB 
EURATOM commitments 
Total commitments for projects 
Average provisioning rate 
Required provisioning of Guarantee Fund 
Balance of payments loans 
Provisioning rate 
Required provisioning of Guarantee Fund 
Total provisioning of Guarantee Fund 
Budgetary margin (+) or requirement (-) 
Total external commitments 
Loan capacity allowed 
by the Guarantee Fund mechanism 
Residual capacity (+) or requirement (-) 1995 
323 
62 
1121 
139 
125 
1447 
50 
1497 
14.1 
211 
700 
15 
105 
316 
7 
2197 
2243 
46 1996 
326 
223 
1114 
361 
175 
1873 
200 
2073 
14.3 
288 
700 
15 
105 
393 
-67 
2773 
2323 
-450 1997 
336 
792 
1000 
250 
150 
2192 
200 
2392 
15 
329 
700 
15 
105 
434 
-98 
3092 
2438 
654 1998 
346 
772 
1000 
250 
150 
2172 
200 
2372 
15 
327 
700 
15 
105 
432 
-86 
3072 
2500 
-572 1999 
356 
732 
1000 
250 
150 
2132 
200 
2332 
15 
322 
700 
15 
105 
427 
-71 
3032 
2556 
-476 
Characteristics of the low hypothesis:' 
1. Mediterranean: renewal at the end of 1996 of the allocation at its existing level, i.e. ECU 3 100 million 
from 1997 to 2001. Turkey: ECU 150 million per annum committed from 1996. 
2. CEECs: renewal at the end of 1996 of the allocation at its existing level, i.e. ECU 3 000 million 
per annum from 1997 to 1999. 
3. South Africa: implementation of the decision in 1995, renewal at a similar level from 1997. 
NB: The ECU 700 million for macrofmancial assistance are a margin for action rather than a forecast. 
Lending capacity is calculated here by taking account, from 1996, of the 75% coverage rate on EIB operations 
in the Mediterranean. It is not therefore directly derived from the amount in the reserve. 
Low hypothesis: variant with the guarantee on all 
EIB operations lowered to 75% in 1996. 
i en Mécus 
|Provisioning required of Guarantee Fund 
;Budgetary margin (+) or requirement (-) 1995 
316 
7 1996 
346 
-20 1997 
382 
-46 1998 
379 
-33 1999 
375 
-19 
Variant on the low hypothesis: 
The guarantee on all EIB external operations is reduced from 100% to 75% of outstanding loans 
from 1996. Linear application from 1996 of the 75% out ol the level for which provisioning exits. 
ANNEX 2 
TABLE B 
Implementation of the Guarantee Fund Mechanism 
Low hypothesis 
Variant: provisioning rate lowered to 12% in 1996 and EIB guarantee to 75% 
:.. 'JWatSsat .5a;"J75Œ 
ECU million 
Reserve 
EIB commitments 
MED 
CEECs 
ALA 
South AF. 
Total EIB 
EURATOM commitments 
Total commitments for projects 
Average provisioning rate 
Required provisioning of Guarantee Fund 
Balance of payments loans 
Provisioning rate 
Required provisioning of Guarantee Fund 
Total provisioning of Guarantee Fund 
Budgetary margin (+) or requirement (-) 
Total external commitments 
Loan capacity allowed 
by the Guarantee Fund mechanism 
Residual capacity (+) or requirement (-) 1995 
323 
62 
1121 
139 
125 
1447 
50 
1497 
14.1 
211 
700 
15 
105 
316 
7 
2197 
2243 
46 1996 
326 
223 
1114 
361 
175 
1873 
200 
2073 
14 
225 
700 
12 
84 
309 
17 
2773 
2946. 
173 1997 
336 
792 
1000 
250 
15? 
2192 
200 
2392 
12.3 
227 
700 
12 
84 
311 
25 
3092 
3344 
252 1998 
346 
772 
1000 
250 
150 
2172 
200 
2372 
12.2 
223 
700 
12 
84 
307 
39 
3072 
3461 
389 1999 
356 
732 
1000 
250 
150 
2132 
200 
2332 
12.1 
218 
700 
12 
84 
302 
54 
3032 
3575 
543 
ANNEX 2 
TABLE C 
Implementation of the Guarantee Fund MechanisrrT| 
Variant: EIB allocations increased, guarantee rate on new 
allocations for EIB operations in third countries is lowered to 75% in 1996. 
Provisioning rate lowered to 10% in 1996. 
ECU million 
Reserve 
EIB commitments 
MED 
CEECs 
ALA 
South AF. 
Total EIB 
EURATOM commitments 
Total commitments for projects 
Average provisioning rate 
Required provisioning of Guarantee Fund 
Balance of payments loans 
Provisioning rate 
Required provisioning of Guarantee Fund 
Total provisioning of Guarantee Fund 
Budgetary margin (+) or requirement (-) 
Total external commitments 
Loan capacity allowed 
by the Guarantee Fund mechanism 
Residual capacity (+) or requirement (-) 1995 
323 
62 
1121 
139 
125 
1447 
50 
1497 
14.1 
211 
700 
15 
105 
316 
7 
2197 
2243 
46 1996 
326 
223 
1114 
361 
175 
1873 
200 
2073 
14 
225 
700 
10 
70 
295 
31 
2773 
3086 
313 1997 
336 
1172 
1500 
350 
150 
3172 
200 
3372 
10.4 
268 
700 
10 
70 
338 
-2 
4072 
4050 
-22 1998 
346 
1152 
1500 
350 
150 
3152 
200 
3352 
10.4 
267 
700 
10 
70 
337 
9 
4052 
4145 
93 1999 
356 
1112 
1500 
350 
150 
3112 
200 
3312 
10.3 
261 
700 
10 
70 
331 
25 
4012 
4262 
250 
ISSN 0254-1475 
COM(95) 404 final 
DOCUMENTS 
EN 11 
Catalogue number : CB-CO-95-439-EN-C 
ISBN 92-77-92811-5 
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