EUROPEAN COMMISSION Brussels, 31.7.2015 COM(2015) 373 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on guarantees covered by the general budget

Situation at 31 December 2014

{SWD(2015) 148 final}



Table of Contents 1.Introduction 2.Operations guaranteed by the EU budget 3.Evolutions of guaranteed operations 3.1.Operations managed directly by the Commission 3.1.1.European Financial Stabilisation Mechanism 3.1.2.Balance of payments facility 3.1.3.Macro-financial assistance loans 3.1.4.Euratom loans 3.2.Evolution of the EIB external financing operations 4.Risks covered by the EU budget 4.1.Definition of risk 4.2.Total risk composition 4.3.Annual risk covered by the EU budget 4.3.1.Risk linked to Member States 4.3.2.Risk linked to third countries 5. Activation of the guarantees and evolution of the Fund 5.1.Activation of guarantees 5.1.1.Payments from cash resources

5.1.2.Payments from the EU budget 5.1.3.Calls on the Fund and recoveries 5.2.Evolution of the Fund 1.Introduction The objective of this report is to monitor the credit risks borne by the EU budget resulting from the guarantees given and the lending operations implemented directly by the European Union or indirectly through the guarantee granted for EIB financing projects outside the Union. This report is submitted pursuant to Article 149 of the Financial Regulation which requires the Commission to report annually to the European Parliament and to the Council on EU budget guarantees and the corresponding risks . The report is structured as follows: section 2 recalls the key features of the operations guaranteed by the EU budget; several other additional crisis management mechanisms, which do not imply any risk for the EU budget, are also presented. Section 3 lays out the evolution of the guaranteed operations. Then, section 4 highlights the main risks covered by the EU budget while section 5 outlines the activation of the guarantees and the evolution of the Guarantee Fund for external actions ("the Fund") . A Commission Staff Working Document (SWD) complements this report with a set of detailed tables and explanatory notes. It also provides a macroeconomic analysis of the countries benefitting from EU loans and/or guarantees, representing the bulk of the exposure of the Fund. 2.Operations guaranteed by the EU budget The risks covered by the EU budget derive from a variety of lending and guarantee operations which can be divided into two categories: –loans granted by the European Union with macroeconomic objectives, i.e. macro-financial assistance ("MFA") loans to third countries, balance-of-payments ("BOP") loans granting support to non-euro Member States experiencing balance-of-payments difficulties, loans under the European financial stabilisation mechanism ("EFSM") granting support to all Member States experiencing or seriously threatened with a severe economic financial disturbance caused by exceptional occurrences beyond their control and are usually activated in conjunction with a financial support by the International Monetary Fund (IMF); –loans with microeconomic objectives, i.e. Euratom loans and, most significantly, European Investment Bank ("EIB") financing of operations in non-Member States ("EIB external financing") that are covered by EU guarantees . The guaranteed EIB external financing, MFA and Euratom loans to third countries have since 1994 been covered by the Fund, while BOP, EFSM and Euratom loans to Member States are directly covered by the EU budget. The Fund covers defaults on loans and loan guarantees granted to non-Member States or for projects in non-Member States. It was established: –to provide a 'liquidity cushion' in order to avoid calling on the EU budget every time a default or late payment on a guaranteed loan arises; and –to create an instrument of budgetary discipline by laying down a financial framework for the development of the EU policy on guarantees for Commission and EIB loans to third countries . If third countries become Member States, loans relating to such countries are no longer covered by the Fund and the risk has to be directly borne by the EU budget. The Fund is provisioned from the EU budget and has to be maintained at a certain percentage of the outstanding amount of the loans and loan guarantees covered by the Fund. This percentage, known as the target rate, is currently 9%. If resources of the Fund are not sufficient, the EU budget will provide the necessary funds. Other crisis management mechanisms which are not covered by the EU budget As part of the response to the crisis, several other mechanisms have been established which, however, do not imply any risk to the EU budget:

- the Greek Loan Facility (GLF) which is financed via bilateral loans from other euro area Member States to Greece, centrally administered by the Commission. - European Financial Stability Facility (EFSF): The EFSF was created by the euro area Member States as a temporary rescue mechanism in June 2010 to provide financial assistance to euro area Member States within the framework of a macroeconomic adjustment programme. The Treaty for a permanent rescue mechanism, the European Stability Mechanism (ESM) entered into force on 27 September 2012. Since 1 July 2013, the EFSF continues with its ongoing programmes to Greece (together with the IMF and some Member States) as well as to Ireland and Portugal (together with the IMF, some Member States and EU/EFSM) but is no longer engaged in new financing programmes or loan facility agreements - European Stability Mechanism (ESM): The ESM is an important component of the comprehensive EU strategy designed to safeguard financial stability within the euro area by providing financial assistance to euro area Member States experiencing or threatened by financing difficulties. It is an intergovernmental organization under public international law, based in Luxembourg, with an effective lending capacity of EUR 500,000 million. 3.Evolutions of guaranteed operations This section sets out the evolution of the guaranteed operations; firstly of those managed directly by the Commission and then of those managed by the EIB. Table 1: Total outstanding amounts covered by the EU budget at 31 December 2014 (in EUR million) Outstanding Capital Accrued Interest Total % Member States* Euratom 324 1 326 < 1 BOP 8,400 190 8,590 10 EIB 2,315 19 2,334 3 EFSM 46,800 707 47,507 56 Sub-total Member States 57,840 917 58,757 69 Third Countries** MFA 1,829 13 1,842 2 Euratom 24 < 1 24 < 1 EIB*** 24,431 164 24,595 29 Sub-total third countries 26,283 178 26,461 31 Total 84,123 1,095 85,218 100 * This risk is directly covered by the EU budget. This also includes, Euratom and EIB loans granted to countries prior to their accession to the EU. ** This risk is covered by the Fund. *** Loans subrogated to the EU following Syria defaults on EIB loans are included

(amount: EUR 107 million). Tables A1, A2a, A2b and A3 of the SWD provide more detailed information on these outstanding amounts, in particular in terms of ceiling, disbursed amounts or guarantee rates. 3.1.Operations managed directly by the Commission 3.1.1.European Financial Stabilisation Mechanism (EFSM) In its conclusions of 9/10 May 2010, the Ecofin Council foresaw a maximum volume of the mechanism of EUR 60,000 million . Moreover, Article 2(2) of Council Regulation No 407/2010 limits the outstanding amount of loans or credit lines to be granted to Member States to the margin available under the own resources ceiling for payment appropriations. Following the Council decisions to grant Union financial assistance to Ireland (up to EUR 22,500 million) and Portugal (up to EUR 26,000 million), disbursements reached EUR 22,500 million to Ireland and EUR 24,300 million to Portugal. Developments during 2014 In March 2014, the final tranche of EUR 800 million was disbursed to Ireland, using the maximum loan capacity for the country. Regarding Portugal, EUR 2,200 million were disbursed in two tranches. The remaining EUR 1,700 million will not be used as the Portuguese government had decided not to request the disbursement. Moreover, the deadline for disbursement has expired. At 31 December 2014, the EFSM had a remaining capacity of EUR 13,200 million, out of its maximum volume of EUR 60,000 million, to provide further assistance to any euro area Member State, if required. 3.1.2.Balance of payments facility The EU medium-term financial assistance under the BOP facility was re-activated in November 2008 to help Hungary and subsequently Latvia and Romania, in January and May 2009, to restore market confidence for a total commitment of EUR 14,600 million. Of this amount, EUR 1,200 million was not disbursed due to no further requests and expiration of the deadline for disbursement. Developments during 2014 Hungary repaid EUR 2,000 million and Latvia EUR 1,000 million. As regards Romania, the Council had decided on 22 October 2013 to make available to Romania a second precautionary medium-term financial assistance amounting to a maximum of EUR 2,000 million in the form of a loan with a maximum average maturity of 8 years. No disbursements have been made yet but the facility may be activated and funds can be requested until 30 September 2015.

At 31 December 2014, the BOP facility had a remaining capacity of EUR 39,600 million out of an overall ceiling of EUR 50,000 million to provide further assistance if required. The outstanding amount of BOP loans has decreased from EUR 11,400 million to EUR 8,400 million in 2014. Developments subsequent to 31 December 2014 Two additionnal re-imbursements were made in January 2015 amounting to EUR 1,200 million for Latvia and to EUR 1,500 million for Romania. Hence, outstanding BOP loans as of 31 March 2015 amount to EUR 5,700 million. 3.1.3.Macro-financial assistance loans As a general rule, MFA decisions are taken by the European Parliament and the Council (Article 212 of the TFEU). However, the Council may adopt the decision on a proposal from the Commission when the situation in a third country requires urgent financial assistance (Article 213 of the TFEU) and this procedure was used in the second MFA package for Ukraine in 2014. Developments during 2014 On 14 April 2014, the Council decided to provide MFA loans to Ukraine for a maximum amount of EUR 1,000 million, which was fully disbursed in 2014. The MFA assistance to Ukraine approved in 2010 together with funds still available from assistance approved in 2002 amount to EUR 610 million in loans. EUR 360 million were disbursed in 2014. On 15 May 2014, the European Parliament and the Council decided to provide macro-financial assistance to the Republic of Tunisia of a maximum amount of EUR 300 milion in the form of loans. Regarding repayments, EUR 96 million were repaid by the beneficiary countries (Bosnia Herzegovina EUR 4 million, former Yugolav Republic of Macedonia EUR 10 million, Lebanon EUR 25 million, Montenegro EUR 1 million Serbia EUR 52 million, and Tajikistan EUR 4 million). The outstanding amount of MFA loans has increased from EUR 564.6 million to EUR 1,828.6 million at 31 December 2014. Developments subsequent to 31 December 2014 The first tranche of EUR 100 milllion to Jordan (out of the EUR 180 million decision) was disbursed in February 2015. In April 2015, the remaining amount of EUR 250 million decided previously was disbursed to Ukraine together with the first EUR 10 million tranche to Georgia (out of the EUR 23 million decision). The first tranche of EUR 100 million to Tunisia (out of the EUR 300 million decision) was disbursed in May 2015. 3.1.4.Euratom loans The Euratom lending to Member States or in certain eligible non-member countries (Russian Federation, Armenia, Ukraine) has a ceiling of EUR 4,000 million of which around 85% has already been disbursed. A loan of EUR 300 million to Ukraine dedicated to the safety upgrade of existing nuclear facilities was signed on 7 August 2013. The disbursement can occur once all conditions for effectiveness have been satisfactorily completed. EUR 326 million remaining out of the EUR 4,000 million decision could be devoted to new projects. Developments during 2014

No disbursements took place in 2014. Repaid amounts consisted of EUR 22.6 million from Bulgaria, EUR 10 million from Romania and EUR equivalent of 6.6 million from Ukraine. 3.2.Evolution of the EIB external financing operations Developments during 2014 The existing EU guarantee for the EIB external financing covering the period 2007-2013 ("the 2007-2013 external mandate") was extended until 30 June 2014 as no decision on a new EU guarantee to the EIB had been adopted by the Council and the European Parliament at 31 December 2013. The new Decision granting an EU guarantee for EIB operations outside the Union for the period 2014-2020 was adopted in April 2014. It establishes that the maximum ceiling of the EU guarantee should be broken down into a fixed ceiling of a maximum amount of EUR 27,000 million and an optional additional amount of EUR 3,000 million. Activation, in whole or in part, of the optional additional amount will be decided in accordance with the ordinary legislative procedure on the basis of the mid-term review of the implementation by the EIB of the Decision and the evolution of EIB operations. In parallel, a new Guarantee Agreement has been signed on 22 July 2014 as required by Article 14 of the Decision. In 2014, with the use of the 2007-2013 and 2014-2020 external mandate, the loan signatures increased by 15% in comparison with the previous year and amounted to EUR 4,059 million. The amount of loans disbursed was EUR 2,260 million (+ 17% compared to 31 December 2013). The 2007-2013 Mandate has been almost fully used, taking into account that net signatures reach EUR 29,026 milllion, when the authorized ceiling was EUR 29,484 milllion. For previous EIB external mandates, see Table A3 of the SWD. Defaults on interests payments and loan repayments from the Syrian Government continued in 2014. The EIB has called on the Guarantee Fund to cover these defaults (see paragraph 5.1.3 below). Outstanding amounts at 31 December 2014 for the various facilities referred to in this section are presented in Table 1. 4.Risks covered by the EU budget 4.1.Definition of risk The risk borne by the EU budget derives from the outstanding amount of capital and interest in respect of guaranteed operations. For the purpose of this report, two methods are used for evaluating the risks borne by the EU budget (either directly or indirectly via the Fund): –"The total risk covered" is based on the sum of the total amount of capital outstanding for the operations concerned on a given date including accrued interest. –The budgetary approach defined as "the annual risk borne by the EU budget" is based on the calculation of the maximum amount of annual payments due which the EU would have to pay out in a financial year assuming that all payments of the guaranteed loans are in default . 4.2.Total risk composition Until 2010 the maximum risk in terms of total outstanding amounts covered was mainly linked to loans granted to third countries. Since 2011, the financial crisis has impacted heavily on the public finances of the Member States leading to an increase in the lending activity of the EU to support higher sovereign financing needs in Member States. As a consequence the composition of risk has changed. At 31 December 2014, 69% of the total outstanding amount concerns borrowing operations linked to loans to Member States which are directly covered by the EU budget (compared to 45% at 31.12.2010). 4.3.Annual risk covered by the EU budget For 2015, the maximum amount which the EU would have to pay out (directly and via the Fund) - assuming that all guaranteed loans would be in default - is EUR 12,379.8 million. This represents the capital and interest payments from guaranteed loans falling due during 2015, assuming that defaulting loans are not accelerated (for details see Table A4 in SWD). 4.3.1.Risk linked to Member States

In 2015, the Fund will bear a maximum annual risk related to Member States (MS) of EUR 9,811 million (ca. 79% of the total annual risk). The risk linked to MS concerns: (a) EIB lending and/or MFA and/or Euratom loans granted before MS accession to the EU; (b) the loans granted under the BOP facility, and (c) the loans granted under the EFSM scheme. Table 2: Ranking of the Member States according to the annual risk borne by the EU budget in 2015 (EUR million) Ranking Country Loans Max annual risk Weight of the country vis-à-vis annual risk of MS Weight of the country vis-à-vis total annual risk (MS and non-MS) 1 Ireland c) 5,676.4 57.9% 45.9% 2 Romania a)+b) 1,882.5 19.2% 15.2% 3 Latvia a)+b) 1,265.3 12.9% 10.2% 4 Portugal c) 684.5 7.0% 5.5% 5 Bulgaria a) 86.1 0.9% 0.7% 6 Hungary a)+b) 63.0 0.6% 0.5% 7 Czech Republic a) 45.7 0.5% 0.4% 8 Poland a) 42.8 0.4% 0.3% 9 Croatia a) 40.6 0.4% 0.3% 10 Slovak Republic a) 15.1 0.2% 0.1% 11 Lithuania a) 4.8 < 0.1% < 0.1% 12 Slovenia a) 4.4 < 0.1% < 0.1% Total 9,811.1 100% 79.3% 4.3.2.Risk linked to third countries In 2015, the Fund will bear a maximum annual risk related to third countries of EUR 2,568.7 million (21% of the total annual risk). The risk linked to third countries concerns EIB lending and/or MFA and/or Euratom loans (details are included in table A2b of the SWD). The Fund covers guaranteed loans to third countries with maturities extending up to 2042. The top ten countries (out of forty-one) are ranked below according to the repayments due in 2015. They account for EUR 2,106 million or 82% of the annual risk related to third countries borne by the Fund. The economic situation of these countries is analysed and commented in point 3 of the SWD. Creditworthiness, as assessed by the rating agencies, is also indicated in each country table. Table 3: Ranking of the 10 most important third countries according to the annual risk borne by the EU budget in 2015 (EUR million) Ranking Country Max annual risk Weight of the country vis-à-vis annual risk of third countries Weight of the country vis-à-vis total annual risk (MS and non-MS) 1 Turkey 535.9 20.9% 4.3% 2 Morocco 309.8 12.1% 2.5% 3 Brazil 254.0 10.0% 2.1% 4 Serbia 242.0 9.4% 2.0% 5 Tunisia 227.3 8.8% 1.8% 6 Egypt 204.2 7.9% 1.6% 7 Bosnia and Herzegovina 99.9 3.9% 0.8% 8 Lebanon 86.9 3.4% 0.7% 9 South Africa 86.3 3.4% 0.7% 10 Syria 57.0 2.2% 0.5% Total of the 10 2,106.3 82.0% 17.0% 5. Activation of the guarantees and evolution of the Fund 5.1.Activation of guarantees 5.1.1.Payments from cash resources When a debtor is late in paying the EU, the Commission draws on its cash resources in order to avoid delays and resulting costs in servicing its borrowing operations . This did not happen in 2014. 5.1.2.Payments from the EU budget If there would be an eventual default, the EU budget would be called to cover the shortfall. As no defaults from Member States occurred during the year 2014, no appropriation was requested. 5.1.3.Calls on the Fund and recoveries In the event of late payment by the beneficiary of a loan to third countries granted or guaranteed by the EU, the Fund is called on to cover the default within three months of the request.