COMMISSION OF THE EUROPEAN CGftMttJNITIES 
C0M(93) 174 final 
Brussels, 3 May 1993 
REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
ON GUARANTEES 
COVERED BY THE GENERAL BUDGET -
SITUATION AT 31 DECEMBER 1992 
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This report describes the situation as regards budget guarantees at 
31 December 1992. 
It is in response to the statement made by the Commission, when the vote 
was taken on supplementary and amending budget No 1/91, that it would 
report to the budgetary authority twice a year on budget guarantees and the 
corresponding risks. 
The Commission has already presented three reports to the budgetary 
authority. 
The report is in three parts: 
1. Description of operations entered in the budget and events since the 
last report. 
2. Situation at 31 December 1992 as regards risks for the budget in future 
years and guarantees already activated. 
3. Assessment of the economic and financial situation of non-Community 
countries benefiting from the most important operations. 
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PART ONE: OPERATIONS ALREADY ENTERED IN THE BUDGET 
At 31 December 1992 the budgetary authority had authorized 21 headings with 
token entries in the 1993 budget, including six new headings for operations 
in favour of Bulgaria, Romania, Latvia, Estonia and Lithuania and EIB loans 
in non-member countries. These headings can be divided into three 
categories: borrowing and lending within the Community, borrowing and 
lending outside the Community and guarantees given to financial 
institutions. 
I. BORROWINGS TO BE ON-LENT WITHIN THE COMMUNITY 
A. COMMUNITY BORROWING OPERATIONS TO PROVIDE BALANCE-OF-PAYMENTS SUPPORT 
The Community is authorized to borrow on the capital markets or from 
financial institutions and make the sums raised available to Member States 
experiencing temporary balance-of-payments difficulties. 
The outstanding amount of loans granted to Member States for this purpose 
may not exceed ECU 14 billion in principal. 
At 31 December 1992 the only operations involved were the two in respect of 
Greece under the decisions of 9 December 1985 and 4 March 1991. 
At 31 December 1992 the amount outstanding in loans to Greece was 
ECU 1.875 million (Table 1). 
B. EURATOM BORROWING OPERATIONS 
In 1977 the Commission was empowered to borrow funds to be used to help 
finance nuclear power stations. 
Loans are made to electricity producers and carry the usual guarantee 
demanded by banks. Recipients are often State-owned companies or companies 
enjoying a State guarantee. 
The maximum amount of borrowings authorized is ECU 4 billion, of which 
ECU 500 million was authorized by the 1977 decision, ECU 500 million in 
1980, ECU 1 billion in 1982, ECU 1 billion in 1985 and ECU 1 billion 
in 1990. At 31 December 1992 the amount of borrowings contracted came to 
ECU 2 768,8 million. 
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At 31 December 1992 the total of borrowings outstanding was 
ECU 1 338 million. 
On 9 December 1992 the Commission proposed that the balance of borrowings 
not used in the Member States could be used to finance the improvement of 
the degree of efficiency and safety of nuclear power stations in the 
countries of Central and Eastern Europe and in the CIS. 
A maximum of ECU 1 124 million could be allocated, 
C. BORROWING OPERATIONS FOR THE PROMOTION OF INVESTMENT IN THE COMMUNITY 
The Commission was empowered by a Council Decision of 16 October 1978 to 
borrow funds to be used to promote investment in the Community (New 
Community Instrument). 
The authorized borrowing ceiling was fixed at ECU 1 billion by the Decision 
of 16 October 1978 and was then raised by ECU 1 billion by the Decision of 
15 March 1982. The ceiling was further raised by ECU 3 billion by the 
Decision of 19 April 1983 and by ECU 750 million by the Decision of 
9 March 1987. 
The proceeds of the operations are paid out in the form of loans granted by 
the EIB, acting for the Commission, to finance investment projects which 
contribute to greater convergence and growing integration and are 
consistent with the priority Community objectives in the energy, industry 
and infrastructure sectors, taking account of such factors as the regional 
impact of the projects and the need to combat unemployment. Support for 
small businesses was also made a priority objective by the Decision of 
26 April 1982. 
A Decision of 20 January 1981 also empowered the Community to contract 
loans in order to provide exceptional aid of ECU 1 billion to the regions 
of Italy affected by the earthquake of November 1980. A similar decision 
involving ECU 80 million was adopted on 14 December 1981 for the regions 
affected by the earthquakes in Greece in February/March 1981. 
The maximum amount of borrowings authorized thus comes to 
ECU 6 830 million. 
At 31 December 1992 the total outstanding was ECU 3 324 million, 15.9% less 
than on 31 December 1991. 
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The risk is spread over a large number of borrowers. In addition, most of 
the loans are global loans to financial institutions which guarantee 
repayment of the funds. 
Every year the EIB provides the Commission with a list of debtors who, 
according to its information, risk defaulting in the coming year. So far, 
no names have been recorded on this list. 
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II. LOANS RAISED FOR ON-LENDING TO NON-COMMUNITY COUNTRIES 
A. PROGRAMME OF BORROWINGS CONTRACTED BY THE COMMUNITY TO PROVIDE 
MEDIUM-TERM FINANCIAL ASSISTANCE TO HUNGARY (Hungary I) 
The Community is granting Hungary a medium-term loan of up to 
ECU 870 million in principal for a maximum of five years. The loan is 
intended to facilitate the adjustment of the Hungarian economy in a way 
which will enable it to derive all the benefits of a market-based economy. 
It is being made available in tranches. 
The first tranche of ECU 350 million was paid on 20 April 1990. A second 
tranche of ECU 260 million was paid on 14 February 1991. The third 
tranche, which is not to exceed ECU 260 million, was planned for 1992 but 
will probably not be paid out now that Hungary's balance of payments is 
more favourable than expected. The tranches will be repaid in one 
instalment after five years and interest, which is at variable rates, is 
payable annually. 
B. ADDITIONAL MEDIUM-TERM FINANCIAL ASSISTANCE TO HUNGARY (Hungary II) 
As the break-up of the Council for Mutual Economic Assistance (Comecon) and 
the Gulf crisis threatened to compromise the initial encouraging results of 
the reforms undertaken, it was decided to launch a supplementary borrowing 
and lending operation for ECU 180 million under an overall ECU 360 million 
G-24 aid programme. 
The first tranche of ECU 100 million was paid on 14 August 1991. It will 
be repaid in one instalment after seven years, and interest, which is at 
variable rates, is payable annually. The second tranche of ECU 80 million 
was due to be paid on 15 January 1993. 
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C. BORROWING CONTRACTED BY THE COMMUNITY TO PROVIDE MEDIUM-TERM FINANCIAL 
ASSISTANCE FOR THE CZECH AND SLOVAK FEDERAL REPUBLIC 
As part of G-24's total aid of around ECU 750 million, the Commission, on 
behalf of the Community, is empowered to borrow, in two tranches, 
ECU 375 million for a period of seven years. The proceeds of this 
operation will be on-lent on the same terms to the Czech and Slovak Federal 
Republic. 
The first tranche of ECU 185 million was paid on 14 August 1991. It will 
be repaid in one instalment after seven years, and interest, which is at 
variable rates, is payable annually. 
The second tranche of ECU 190 million was paid on 2 March 1992 and will be 
repaid in one instalment after six years. 
Following the division of Czechoslovakia into the Czech Republic and the 
Slovak Republic on 1 January 1993, the status of the Community loan is 
being discussed by the authorities of the two Republics and the Commission. 
D. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT BULGARIA MEDIUM-TERM 
FINANCIAL ASSISTANCE 
As part of G-24's total aid of ECU 580 million, the Commission, on behalf 
of the Community, is empowered to borrow, in two tranches, ECU 290 million 
for a period of seven years. The proceeds of this operation will be on-
lent on the same terms to Bulgaria. 
The first tranche of ECU 150 million was paid to Bulgaria on 
14 August 1991. It will be repaid in one instalment after seven years, and 
interest, which is at variable rates, is payable annually. 
The second tranche of ECU 140 million was paid on 2 March 1992 and will be 
repaid in one instalment after six years. 
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E. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT BULGARIA ADDITIONAL 
MEDIUM-TERM FINANCIAL ASSISTANCE 
Following Parliament's favourable opinion of 17 September 1992, the Council 
decided on 19 October 1992 to grant additional financial assistance to 
Bulgaria under the new G-24 aid package of ECU 220 million. 
The Community will be lending a maximum of ECU 110 million in two tranches. 
The maximum term of the loan is to be seven years. 
The operation should start in the course of 1993. 
F. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT ISRAEL MEDIUM-TERM 
FINANCIAL ASSISTANCE 
As part of the financial assistance agreed by the Council for Israel and 
the population of the occupied territories following Parliament's 
favourable opinion, the Commission is empowered to borrow, on behalf of the 
Community, ECU 160 million in one tranche for a period of seven years. The 
proceeds will be paid out to Israel on the same terms and will be 
accompanied by an interest subsidy of ECU 27.5 million paid from the 
Community budget. 
This operation started on 2 March 1992. The borrowing is to be repaid in 
full on 15 December 1997. 
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G. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT ROMANIA MEDIUM-TERM 
FINANCIAL ASSISTANCE 
This new operation was approved by the Council on 22 July 1991 after 
Parliament delivered a favourable opinion on 17 May 1991 and involved the 
entry of a specific guarantee heading in the budget by means of 
supplementary and amending budget No 2/91 which was finally adopted on 
23 December 1991. The operation involves the borrowing and lending of 
ECU 375 million for a maximum period of seven years. It will be paid in 
two tranches. The first tranche of ECU 190 million was disbursed in 
January 1992 for a period of six years. The second tranche was paid on 
2 March 1992. 
H. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT ROMANIA ADDITIONAL 
MEDIUM-TERM FINANCIAL ASSISTANCE 
Following Parliament's favourable opinion of 17 November 1992, the Council 
decided on 27 November 1992 to grant further financial assistance to 
Romania under the new G-24 aid package of ECU 160 million. 
The Community will be lending a maximum of ECU 80 million for a maximum of 
seven years. 
In view of its size, the loan will be paid out in a single tranche in the 
course of 1993. 
I. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT ALGERIA MEDIUM-TERM 
FINANCIAL ASSISTANCE 
This operation was adopted by the Council on 23 September 1991 after 
Parliament delivered a favourable opinion on 12 July 1991 and the specific 
guarantee heading was entered in the budget by means of supplementary and 
amending budget No 2/91, which was finally adopted on 23 December 1991. 
The operation involves the borrowing and lending of ECU 400 million in two 
tranches of ECU 250 million and ECU 150 million. A bridging loan was 
granted on 23 December 1991 to cover the first tranche of ECU 250 million 
before arrangements were made to contract the corresponding borrowing in 
January 1992. The second tranche has not yet been paid. 
J. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT MEDIUM-TERM FINANCIAL 
ASSISTANCE TO THE SOVIET UNION AND/OR ITS REPUBLICS 
The Commission has proposed a medium-term loan of up to ECU 1 250 million 
for the Soviet Union and/or its Republics in order to finance imports of 
agricultural products, foodstuffs and medicines from the Community and 
Eastern Europe. 
Parliament delivered a favourable opinion and the Council adopted its 
formal decision on 16 December 1991. The guarantee heading was set up when 
the 1992 budget was adopted in December 1991. 
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The loan will be divided between the various Republics of the former Soviet 
Union for a maximum period of three years. 
The first loan contracts were signed in July 1992: 
with Armenia (ECU 38 million), Kyrgyzstan (ECU 32 million), 
Turkmenistan (ECU 45 million) and Moldova (ECU 27 million) on 
10 July 1992; 
with Ukraine (ECU 130 million) on 13 July 1992; 
with Belarus (ECU 102 million), Tajikistan (ECU 55 million) and Georgia 
(ECU 70 million) on 24 July 1992; 
with Russia (ECU 150 million) on 9 September 1992; 
with Russia (ECU 349 million) on 9 December 1992; 
with Kazakhstan (ECU 25 million) on 15 December 1992. 
The first loans were disbursed in late 1992 and the amount outstanding at 
31 December came to ECU 123 million. 
K. BORROWING CONTRACTED BY THE COMMUNITY TO GRANT MEDIUM-TERM FINANCIAL 
ASSISTANCE TO ESTONIA, LATVIA AND LITHUNIA 
Following Parliament's favourable opinion of 30 October 1992, the Council 
decided on 23 November 1992 to grant financial assistance to these three 
countries under the G-24 aid package. 
The loans will be paid in two separate tranches for each of the three 
States. 
They should be paid out in the course of 1993 for a maximum of seven years. 
The maximum to be granted is: 
- ECU 40 million for Estonia; 
ECU 80 million for Latvia; 
ECU 100 millioni for Lithuania. 
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in. COMMUNITY GUARANTEE TO NON-COMMUNITY COUNTRIES 
A. EUROPEAN INVESTMENT BANK LOANS TO MEDITERRANEAN COUNTRIES GUARANTEED BY 
THE GENERAL BUDGET 
Under the terms of the Council Decision of 8 March 1977, the Community 
guarantees loans to be granted by the European Investment Bank as part of 
the Community's financial commitments towards the Mediterranean countries. 
This decision was the basis for the contract of guarantee signed by the 
European Economic Community and the European Investment Bank on 
30 October 1978 in Brussels and 10 November 1978 in Luxembourg introducing 
a global guarantee of 75% of all credit lines made available for loans in 
the following countries: Portugal (Financial Protocol, pre-accession aid), 
Greece, Spain (financial cooperation), Malta, Tunisia, Algeria, Morocco, 
Turkey, Cyprus, Egypt, Jordan, Syria, Israel, Yugoslavia and Lebanon. 
In addition, by way of exception, a 100% guarantee covers loans allocated 
for emergency aid to Portugal in accordance with the Council Decision of 
7 October 1975. 
A new extension of the contract of guarantee is established for each new 
Financial Protocol. 
The loans authorized at 31 December 1992 total ECU 7 517 million, of which 
ECU 1 500 million is for Spain, Greece and Portugal and ECU 6 017 million 
for the non-member Mediterranean countries. At 31 December 1992 the total 
of outstanding loans came to ECU 2 089 million, of which ECU 645 million 
was accounted for by Spain, Greece and Portugal and ECU 1 444 million by 
the non-member Mediterranean countries. 
However, as the global guarantee for most of these operations is 75%, the 
budget risk is no higher than ECU 3 269.2 million. Of this total, 
ECU 1 134 million is accounted for by loans to Spain, Greece and Portugal, 
which have all been granted to State bodies or are covered by a State 
guarantee. 
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When the signature of a fourth series of protocols is taken into account, 
the breakdown of authorizations by country (non-member countries only) is 
as follows: 
Old protocols 4th protocols 
Authorizations Total 
Algeria 
Cyprus 
Egypt 
Israel 
Jordan 
Lebanon 
Malta 
Morocco 
Syria 
Tunisia 
Turkey 
Yugoslavia* 360 
92 
492 
133 
118 
177 
55 
297 
208 
250 
90 
760 280 
310 
82 
80 
45 
220 
168 
730 640 
92 
802 
215 
198 
222 
55 
517 
208 
418 
90 
760 
3 032 1 185 4 217 
The second protocol with Yugoslavia was suspended on 25 November 1991 but 
the EIB was asked to resume operations in Bosnia-Hercegovina, Croatia, 
Macedonia, Montenegro and Slovenia as part of the programme of positive 
measures. 
There is also provision for EIB loans outside these protocols under Council 
Regulation (EEC) No 1763/92 of 29 June 1992 concerning financial 
cooperation in respect of all Mediterranean non-member countries. 
EIB loans under this operation must not exceed ECU 1 800 million. 
The loans are generally for 15 years with 3 to 4-year periods of grace on 
capital repayments. 
The second protocol with Yugoslavia was suspended when ECU 100 million 
of credits were still to be agreed and ECU 290 million of credits 
agreed were still to be disbursed. 
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B. LOANS GRANTED BY THE EUROPEAN INVESTMENT BANK IN COUNTRIES OF CENTRAL 
AND EASTERN EUROPE 
In response to a call made by the Council on 9 October 1989, the Board of 
Governors of the European Investment Bank decided on 29 November 1989 to 
authorize the Bank to provide loans from its own resources to finance 
investment projects in Hungary and Poland for a total amount not exceeding 
ECU 1 billion. These loans are granted to finance investment projects 
which satisfy the Bank's usual requirements for loans from its own 
resources. The contract of guarantee was signed on 24 April 1990 in 
Brussels and 14 May 1990 in Luxembourg. 
On 14 May 1991 the budgetary authority extended this guarantee to loans 
made in Czechoslovakia, Bulgaria and Romania up to a maximum of 
ECU 700 million. 
The extension of the contract of guarantee was signed on 31 July 1991. 
On 23 October 1992 the Commission presented a proposal for a Council 
Decision extending this Community guarantee to losses incurred by the EIB 
as a result of loans granted to Estonia, Latvia and Lithuania. 
The overall ceiling on loans which the EIB may grant in these countries was 
set at ECU 200 million for a period of three years. 
On 18 December 1992 the Commission also proposed the extension of this 
guarantee to losses incurred by the EIB as a result of loans granted in 
Albania. 
The overall ceiling on loans which the EIB may grant in Albania was set at 
ECU 50 million for a period of three years. 
The loans are generally long-term: 15 years on average with 3 to 4-year 
periods of grace on capital repayments. 
At 31 December 1992, ECU 820 million had been made available in these five 
Eastern European countries but only a little less than ECU 147 million had 
been disbursed. 
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C. LOANS GRANTED BY THE EUROPEAN INVESTMENT BANK IN NON-MEMBER COUNTRIES 
At its meeting of 19 May 1992 the Council (Economic and Financial Affairs) 
agreed to give practical substance to the agreement reached in principle on 
this issue the previous year. 
It adopted the following guidelines: 
EIB loans can be granted in countries with which the Community has 
concluded cooperation agreements and for projects of mutual interest; 
- loans may be granted, for projects that meet the Bank's usual criteria, 
on a case-by-case basis by the Board of Directors; 
- an overall limit of ECU 250 million per year shall be set for a 3-year 
period; this arrangement shall be reviewed at the end of the period. 
The Council agreed that these loans should benefit from Community budget 
guarantees. The Commission presented a proposal for a decision to this 
effect on 3 June 1992. 
The budgetary authority set up a heading for this purpose in the 1993 
budget. 
D. COMMUNITY CREDIT GUARANTEE FOR EXPORTS OF AGRICULTURAL PRODUCTS AND 
FOODSTUFFS FROM THE COMMUNITY TO THE FORMER SOVIET UNION 
The Community has decided to guarantee loans granted to the former Soviet 
Union by a pool of banks to finance imports of agricultural products and 
foodstuffs originating in the Community and the countries of Central and 
Eastern Europe. 
The Community guarantee covers 98%, up to a maximum of ECU 500 million, of 
any losses in principal and interest. 
The Community will receive a surety commission of 0.67% of the amount 
guaranteed in consideration for this guarantee. Half of this commission 
was paid on 26 December 1991 under the terms of the contract. The balance 
is to be paid one month after the end of the drawing period. 
On 26 November 1991 the terms of the loan and the arrangements for the 
utilization of the funds were laid down in an exchange of letters between 
the Commission and the Soviet authorities. On the same day the Community 
and the banks signed a contract of guarantee. 
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The loan is for three and a half years from the date of signature. 
Interest will be payable half-yearly and the principal will be repaid in 
three instalments, 20, 31 and 42 months after the agreement has been 
signed. 
The first repayment of capital is due on 26 July 1993. 
The first interest payment was due on 9 September 1992 and was made on 
25 September 1992. 
Following the disappearance of the Soviet Union, it has been decided that 
the funds will be used by the Russian Republic. 
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PART TWO: RISK SITUATION 
There are two possible methods for evaluating the risks borne by the 
Community budget: 
the method, often used by bankers, of the total amount of capital 
outstanding for the operations concerned on a given date; 
the more budgetary approach of calculating the maximum amount which the 
Community could have to pay out in each financial year. 
The second approach itself has been applied in two different ways: 
- by reference only to actual disbursements at 31 December 1992, giving 
the minimum level of risk to the Community assuming that there are no 
early repayments; 
on a more forward-looking basis, by reference to all the operations 
proposed by the Commission in order to estimate the impact on future 
budgets, giving the maximum risk borne by the Community assuming that 
the Commission's proposals are accepted. 
For the latter exercise a number of assumptions have to be made about dates 
of disbursement, terms of repayment, interest and exchange rates, etc.; 
details are given in the annex. However, this method does give some idea 
about the future level of risks connected with the proposals made. 
The results are shown in the attached tables, which assess the risk 
relating to countries inside the Community and countries outside the 
Community. 
The overall figures quoted cover risks of different types; loans to one 
country in the case of financial assistance and loans for projects 
guaranteed by the borrowers in the case of NCI and EIB operations, for 
example. 
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AMOUNT OUTSTANDING AT 31 DECEMBER 1992 (Table 1) 
The amount of capital outstanding on Community borrowings and guaranteed 
loans at 31 December 1992 can be broken down as follows: 
- ECU 7 184 million for operations within the Community; 
ECU 4 249 million for risks in non-Community countries;* 
giving a total of ECU 11 433 million. 
Since 31 December 1992 the total amount of loans outstanding has again 
dropped as a result of the fall in the amount outstanding in respect of 
operations within the Community; the amount outstanding accounted for by 
non-member countries has further increased from 34.5% to 37.2% of the 
total. 
II. MAXIMUM ANNUAL RISK BORNE BY THE COMMUNITY BUDGET: OPERATIONS 
DISBURSED AT 31 DECEMBER 1992 (Table 2) 
A. TOTAL 
The total risk involved in the annual debt-servicing for all countries 
should peak at ECU 3 362 million in 1993 before dropping to 
ECU 2 001 million in 1996 after which it will rise to ECU 2 481 million in 
1997 and then fall again. 
However, a distinction should be made between Member States and non-member 
countries when the overall situation is being assessed. 
B. MEMBER STATES 
Payments of capital and interest on loans disbursed at 31 December 1992 
should be slightly less than ECU 2.8 billion in 1993 and then fall to less 
than ECU 1 500 million. 
Of which ECU 1 591 million in EIB loans and ECU 2 658 million for 
Community borrowing/lending operations. 
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C. NON-MEMBER COUNTRIES 
The annual risk in respect of non-member countries depends on the timetable 
for the repayment of financial assistance, as shown in the table below: 
TOTAL RISK 
of which 
Hungary I 1 
Hungary I 2 
Algeria 1 
Hungary II 1 
Czechoslovakia 1 
Czechoslovakia 2 
Bulgaria 
Romania 
Israel 1995 
1079 
(350) 1996 
671 
(260) 1997 
1117 
(250) 
(190) 
(140) 
(160) 1998 
915 
(100) 
(185) 
(150) 
(185) 
III. FORECAST OF ANNUAL MAXIMUM RISK: OPERATIONS DISBURSED, DECIDED BUT 
NOT YET DISBURSED AND OPERATIONS PROPOSED (Table 3) 
This figure is an indication of the potential annual maximum risk borne by 
the budget. It does not mean that these amounts will actually have to be 
paid from the budget, since any default will lead to the suspension of 
further payments to the country in question. 
A. TOTAL 
The total annual risk for all countries will come to ECU 3 584 million in 
1993, before dropping to ECU 3 121 million in 1994, increasing again to 
ECU 4 086 million in 1995, falling again to ECU 3 683 million in 1996 and 
reaching ECU 4 301 million in 1997 and ECU 4 578 million in 1998. 
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B. MEMBER STATES 
Developments will be much the same as for loans disbursed since there are 
few operations which still have to be carried out. The risk will peak at 
ECU 2 843 million in 1993 and then drop sharply. 
C. NON-MEMBER COUNTRIES 
The risk in respect of non-member countries will be slightly different -
there will be a steady rise to ECU 2 321 million in 1995, a fairly sharp 
drop the following year and another increase to ECU 2 015 million in 1997 
and ECU 2 229 millilon in 1998. 
IV. ACTIVATION OF GUARANTEES 
In the second half of 1992 the EIB again called on the budget guarantee in 
respect of loans of around ECU 4.5 million to the Republics of former 
Yugoslavia (Bosnia-Hercegovina, Macedonia and Serbia). This was paid from 
the budget on 14 December 1992. 
At 31 December the Republics of former Yugoslavia still had to repay 
ECU 8.5 million in respect of debts paid by the Community. Lebanon had 
repaid its debts in full. 
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PART THREE: CHANGES IN POTENTIAL RISKS 
The figures given in the previous parts provide information on the 
quantitative aspects of the risks borne by the general budget. 
However, these data should be weighted in accordance with aspects relating 
to the quality of the risk, which depend on the type of operation and the 
standing of the borrower. 
I. TYPES OF OPERATION 
The risks to which the above figures relate derive from a variety of 
operations which can be divided into two categories: operations with 
macroeconomic objectives and those with microeconomic objectives. 
A. OPERATIONS WITH MACROECONOMIC OBJECTIVES 
The first of these are the balance of payments loans for Member States, 
normally carrying strict economic conditions and undertakings. 
Financial assistance operations are similar in nature but are intended for 
non-member countries. 
Finally, this category includes the credit guarantee for imports of 
agricultural products and foodstuffs into the Soviet Union, since the risk 
involved in this operation depends to a large extent on macroeconomic and 
political developments in the country. 
B. OPERATIONS WITH MICROECONOMIC OBJECTIVES 
These are loans to finance specific projects which are usually repaid over 
the long term from funds which these projects are expected to generate; as 
a rule, they are granted to State companies or financial institutions and, 
in addition to the Community guarantee, are covered by the usual guarantees 
demanded by banks. 
They are the Euratom and NCI loans in Member States and EIB loans outside 
the Community (Mediterranean and Central and Eastern Europe). 
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Economic and Financial Situation of Third Countries Receiving Assistance Under 
Operations with Macro-economic Objectives 
All countries receiving assistance under operations with macroeconomic objectives have 
been implementing stabilization and reform programmes. The economic and financial 
performance of these countries largely depends on the degree of progress with the far-
reaching structural reforms that the assistance supports. • 
This section also provides information on a number of countries of Central and Eastern 
Europe that are not receiving this type of assistance, the successor States to Yugoslavia 
and the ex-Soviet Republics, 
A. HUNGARY 
Since 1989 the Hungarian economy has embarked on a major effort of stabilization and 
medium-term adjustment. However, the reform process has been accompanied by a 
severe contraction of economic activity; GDP dropped by 10.2% in 1991 and by an 
estimated 5% in 1992. Inflation has gradually declined to a year-on-year rate of 21.6% 
in December 1992 but unemployment has continued to climb, reaching 663,000 (12.2% 
of the work force) in the same month. The State budget deficit is estimated to have 
reached Ft 197 bn in 1992 (above the target of 5% of GDP), mainly as a result of 
higher than expected rails in revenue. In response to this poor fiscal performance, the 
IMF froze its assistance in the second half of 1992. 
The programme of stmctural reform proceeds, and key legislative acts were passed in 
1991 and 1992. The bulk of the legislation to redefine ownership rights and to set up a 
market based business environment was passed in 1991. In 1992, the Government 
focussed on the reform of public finance and on legislation related to the mfrastructure 
and social sectors. Restructuring is progressing slowly. End 1992, about 16% of State 
assets had been privatized. Some large sectors, such as transport, agriculture or banks, 
have so far remained unaffected by this move. Private sector growth is nevertheless 
sustained, with the rapid emergence of a new SMEs sector and the sizeable inflow of 
foreign capital. Overall the private sector contribution to GDP in 1992 is estimated at 
about 30%. 
In 1992 as in the two previous years, the balance of payments performance has been 
better than expected. At the end of October 1992, the trade balance and current 
account recorded a surplus of, respectively, US$ 489 million and US$ 704 million 
against the initial forecast of a deficit. The combination of sustained export growth and 
substantial tourism and transfers surpluses freed Hungary from any foreign exchange 
constraint, in particular for the service of its debt The debt service ratio fell from 
43.2% in. 1990 to around 30% in 1991 and is estimated to have fallen further in 1992. 
The inflow of investment into the country and the support from the IMF, the World 
Bank and the G-24 strengthened the official reserves, which are now at a satisfactory 
level (US$ 5.1 billion in October 1992, i.e. 5 months' imports). 
The country's external gross debt stabilized around US$ 22.5 billion in the third quarter 
of 1992. In 1991 the structure of Hungary's debt improved significantly as the 
proportion of short-term loans was reduced to 9.6%. The price of Hungarian debt on 
the secondary market has levelled off at around 90% as a result of prompt debt 
servicing by the Hungarian authorities and the perceived reduction in the risk of 
rescheduling. In 1992 Moody's rated the National Bank of Hungary's bond issues BA1 
while Standard and Poor's rated them BB-K 
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B. Czech and Slovak Republics 
Some indications have become available that the economic stabilization which seemed 
to occur in mid-1992 (production in traditional sectors was stabilizing at its depressed 
level and output and employment growth in new sectors was gaining momentum) was 
only short-lived. First provisional estimates show a decline of GDP by almost 10% in 
1992 compared to 1991 (GDP dropped by 16% in 1991), implying a significant 
deterioration in the economic performance in the second half of the year (ininus 5% 
compared to the first half). Furthermore, inflation which came down to a single-digit 
figure between May and August 1992 accelerated again to a monthly rate of 2% since 
September, before the introduction of VAT led to another surge in prices in January 
1993. The overall public budget has remained by and large balanced although its 
underlying trend is not very favourable, and Slovakia's deficit is approaching 4% of its 
GDP. The first wave of large-scale privatization was completed by end 1992. 
Uncertainty about the procedures and effects of the split of Czechoslovakia into two 
independent states may have been the major cause for the surprising further decline in 
economic activity in the course of the year. Indeed, this issue dominated political 
discussion and political action throughout 1992, leading to significant irritations on 
behalf of potential domestic and foreign investors. Furthermore, investment and large-
scale capital-stock modernization were also hampered by large-scale voucher 
privatization as new owners were not yet in power while old owners and managers were 
no longer seriously interested in structural adjustment. In consequence, underinvestment 
has continued in both republics. Unemployment rates continued to come down in the 
course of 1992 with the Czech unemployment rate dropping below 3% while Slovakia's 
unemployment rate came down from almost 13% in early 1992 to slightly above 10% 
by the end of the year. However, labour productivity has not yet picked up. This 
indicades that large-scale labour-market adjustment is still ahead. 
The split of the two republics which also reflected divergent philosophies of economic 
policy (market-oriented in the Czech Republic versus more state intervention in 
Slovakia) has been managed in a peaceful way. Both republics agreed on the split of 
assets and Habilities with the general rule of 2 (for the Czech Republic) to 1 (for 
Slovakia). Furthermore, a customs union was established and monetary union has 
initially been rnaintaîned, but preparations are under way for an immediate split of 
currencies. 
The balance of payments has been very strong in 1992. The overall balance of 
payments is estimated to have recorded a surplus of US$ 2.2 billion (US$ L2 billion in 
1991). Trade balance is estimated to have registered a small deficit, although exports to 
the West have been growing strongly. Inflows of foreign direct investment, initially 
very strong, has been dampened by the impending dissolution of the federation during 
the second half of 1992. Official reserves were reaching the equivalent of 2.8 months of 
imports by year-end (1.3 months in 1991). In light of the strength of the reserves, the 
authorities decided not to draw on IMF resources under the stand-by arrangement 
during the latter part of the year (although the performance criteria were met and the 
review of the programme was successfuJly completed). At end-1992, gross external 
debt in convertible currencies stood at US$ 9.9 billion, and debt service at 13 percent 
of exports (down from 15 percent in 1991). The exchange rate, which is pegged to a 
basket of five currencies remained stable. 
- 22 -
C. BULGARIA 
Bulgaria's economic performance has been worse than that of most other countries of 
the region. In 1991 real GDP fell by 17%, real wages fell by about half, and inflation 
was over 300%. The decline continued in 1992, with GDP falling by a further 13% in 
real terms in the first half of die year; industrial output is down about 20% over 1991, 
with only tentative signs of recovery; inflation remains high at 4-6% per month (80% 
overall in 1992), and unemployment is over 15% of the labour force. External factors 
have exacerbated the crisis: the debt problem (Bulgaria has been cut off from foreign 
credits since 1990 when it declared a unilateral moratorium on debt-servicing), the 
collapse of the ex-USSR, on which Bulgaria was more dependent than other countries, 
large uncollectable claims on Libya and Iraq, and most recently, the embargo against 
Serbia, which was a major export market 
Economic reform has so far mainly consisted of Hberalization and stabilisation 
measures. In particular, cautious macroeconomic policies and an early introduction of 
internal convertibility allowed most domestic prices to adjust to market-clearing levels 
without triggering an mflarionary spiral. Structural reform has proceeded more slowly, 
in part because of inadequate political consensus during 1991. In the first months of 
1992, however, considerable legislative progress on privatization and other structural 
measures was made. In particular, small-scale privatization and restitution are 
advancing well. On the other hand, there have been considerable delays in large-scale 
privatization; the fall of the government in October last year (a new government was 
only formed in the very end of 1992) further delayed its implementation. There are, 
however, some grounds for optimism for the near future since the new Prime Minister 
has declared his cabinet the "government of privatization". For medium-term prospects, 
much will depend on how vigorously the legislation is implemented. A resumption of 
growth will need to be export-led - there is no room for monetary or fiscal stimuli. This 
requires that the debt crisis be resolved, and that export markets, especially in Europe, 
be sufficiently open. 
After the end of the political crisis, Bulgaria resumed its relations with the IMF in the 
framework of the stand-by arrangement with the Fund expiring in April 1993. The 
government is at present negotiating a new annual programme, to be supported by a 
new SBA. 
The improvement of the external financial situation of the country continued in 1992. 
The current account deficit on a cash basis was once more below US$ 1 billion. The 
trade balance was slightly positive, following a bigger increase of exports than of 
imports (imports are still low, mainly due to shortfalls in external financing). 
International reserves increased to over US$ 1.1 billion in the end of October 1992, or 
three months* imports. They remain, however, weak in view of the likely needs that 
may arise in the context of the settlement of Bulgaria's commercial debt. The 
negotiations with the commercial banks on this issue have recently progressed. In 
November, the two parties reached an agreement on the main principles for a future 
debt and debt service reduction package. The new Bulgarian government's intention is 
to continue the negotiations and seek the conclusion of the deal during the months 
ahead. In December 1992, Bulgaria secured a further debt relief from its official 
creditors. The new Paris Club agreement reschedules the debt servicing due up to 
April 1993 and the arrears incurred since the expiry of the consolidation period covered 
by the previous agreement (concluded in April 1991). Overall, the external debt is 
estimated at US$ 12 billion. For almost half, this debt is made up of arrears on short-
term deposits and letters of credit. The debt has been increasing in 1992 since Bulgaria 
is still accumulating arrears (the interest payments that were resumed in September 
amount to only 25% of current interest falling due). The price of this debt on the 
secondary market has fluctuated around 20%. The debt-service ratio is around 50% of 
convertible currency export earnings. 
- 23 -
D. ROMANIA 
The Romanian authorities continued to apply during 1992 the comprehensive 
stabilization and reform programme embarked upon in 1991. The new government, 
formed after the September 1992 elections., has pledged its commitment to continued 
reform. The main problem of the Romanian economy has been the sharp falls in output. 
Real GDP fell by 13% in 1991 and is estimated to have declined by 16% in 1992. 
Unemployment stood at 8.6% in October 1992 but is rising rapidly. The government 
has maintained prudent fiscal and monetary policies. In 1992, fiscal deficit was limited 
to 2 percent of GDP and credit expanded by only 70 percent, remaining below the 
programmed ceiling. However, the rate of inflation, although on a declining trend, still 
reached some 200 percent in 1992 (473 percent in 1991); a large part was due to price 
liberalization and subsidy cuts introduced in the course of the year. 
Economic reform is proceeding at a steady pace. The operation of the tax system is 
being streamlined and VAT will be introduced in July 1993. The privatization process 
is well advanced in the farm sector but is proceeding slowly in the industrial area. A 
disturbing element has been the re-emergence of a parallel exchange market, where the 
national currency is sold at a discount, which by end-1992 exceeded 20 percent. 
The external situation of Romania, which had deteriorated sharply in 1991, recovered 
in 1992. Export performance was strong, while imports declined, resulting in a 
significant improvement in the current account, which registered a deficit of some $ 
0.75 billion (roughly half of its size in 1991). Despite delays in disbursements from 
official sources, international reserves increased by some $0.2 billion. 
The policy of accelerated repayment of the debt pursued by the authorities in the latter 
part of the 1980s has resulted in a low debt-service ratio (2% in 1991 and 8% in 1992). 
2A 
E. THE BALTIC STATES 
The economies of the Baltic states were highly integrated within the Soviet Union 
economic system, from which they regained their independence in August 1991. All three 
countries have suffered a prolonged downturn in economic activity as trade with former 
Soviet republics, particularly Russia, lias declined. 
Estonia 
Prebminary estimates of GDP for 1992 point to a decline of 26%, following declines of 
12.6% in 1991 and 3.6% in 1990. Registered unemployment in December 1992 stood at 
12,579 (about 1.5% of the labour force). Hidden unemployment is believed to be much 
higher. The budget for the first haff of 1992 showed a surplus of 1.4% of GDP, and a 
similar figure is expected for the full year when the data are available. However, the 
problem of tax arrears h making the maintenance of budget balance increasingly difficult 
Inflation is now under control: in December 1992 the monthly increase in the consumer 
price index was 33%. 
Price bT>eralization has largely been completed, and the emergence of a rational price 
strncmre has been assisted by the introduction of Estonia's own convertible currency- the 
kroon. Privatization has so far been limited to small-scale enterprises, with over 40% 
sold into private ownership. The government aims to accelerate the process of 
privatization through a newly established privatization bureau. However, problems, 
continue to surround the restitution issue, following the mdeflnite extension of the 
deadline for restitution claims. The commercial banking system is undergoing a liquidity 
crisis. This has prompted the government to pursue the recapitalization of the banks by 
means of a bond issue and support from the foreign exchange reserves. 
In 1992, Estonia's current account, which had shown a substantial surplus in the previous 
year, deteriorated sigrifficantfy as Russia started to charge world market prices for its 
exports to Estonia at the begriming of the year. However, there are first indications that the 
current account may have recorded a small surplus, as imports dropped below xjrogrammed 
levels owing to delays in the disbursement of expected external official firiancing- Estonia's 
trade with the FSU did not rccpvcr significantly in the course of 1992 (export and import 
volumes were more than 50% below the respective 1990 levels), whereas trade with the 
West expanded rapidly; in the third quarter it œrtstitnted ronghîy half of overall trade. The 
overall trade balance is estimated to have been in deficit. Official reserves increased by $ 75 
nrio in the coarse of 1992 excluding the restitution of prewar gold by the BIS, the UK and 
Sweden. Estonia purchased the first tranche (about $11 mio) from the IMF under a one-
year stand-by agreement totalling about $39 mio for the period 1 July 1992 - 30 June..1993. 
At the end of last-year, the foreign debt amounted to $ 24.2 nrio (about 3% of GDP). This 
does not include the 0.62% share of the FSU debt (now estimated at close to $80 bn) which 
was attributed to Estonia in the negotiations on the resrx>risibility of this debt, but was never 
recc^nized by Estonia. Bilateral negotiations with Russia will determine whether Estonia's 
external position has to be modified after all claims and liabilities have been taken into 
account 
Latvia 
GDP is likdy to have declined by about 30% in 1992. By December 1992 there were 
33,200 registered anemployed in Latvia, or 2.3% of the workforce. Moreover, hidden 
unernployment is widespread, with 15% to 20% of industrial employees estimated to be 
on indefinite unpaid leave. The 1992 budget is expected to show a deficit of about 1.1 % 
of GDP. The present budget proposals far 1993 envisage balance for current expenditures 
but a small overall deficit to allow for capital investment. The increase in retail prices has 
moderated in recent months, in line with the decline in real wages. In September 1992 the 
index of retail prices was 644% higher than in the same month in 1991. 
25 
l*ncc liberalization lins progressed well in Latvia; only a few items remain subject to 
control. IVivatization, however, has progressed only slowly. This LS partly due to the 
provisions for restitution, which set mid-1992 as the deadline for the submission of claims 
on enterprises and land, and October 1994 for housing. So far privatization has mainly 
been confined to small enterprises. A law adopted in August identifies an initial 25 large-
scale eiiterprises suitable for early privatization. A list of 600 enterprises has also been 
identified as eligible for privatization. 
Latvia's current account situation worsened significantly in 1992 due to the substantial 
terms of trade shock which affected the economy in the begmning of the year when Russia 
started to charge market prices for its exports to Latvia. There are first indications that the 
deficit in the trade balance, which was incurred entirely with the FSU, was more than 
compensated by a surplus in the services balance resulting in a current account surplus. 
However, an unexplained outflow of private capital points to an underreporting of actual 
import levels. As in the other two Baltic countries delays in the disbursement of external 
official aid constrained the expansion of imports and production. Gross national reserves 
increased by $48 nrio in 1992, but only by $12 million on a net basis after taking into 
account the purchases of the first two tranches (together S36 mio) from the IMF under the 
one-year stand-by arrangement totalling about $T7 mio. Latvia's official external debt 
outstanding stood at $59 mio (4.8% of GDP) on 31 December 1992 and the ratio of debt 
service to exports was 2.1%. Latvia never recognized the 1.14% share of the FSU debt it 
was assigned during the negotiations of the FSU; it will be the outcome of negotiations on 
this and other issues with Russia to what extent Latvia's official external debt has to be 
modified. 
Lithuania 
GDP is estimated to have declined by about 39% in 1992, following declines of about 
13% in 1991 and 5% in 1990. Unemployment stood at 12,651 in November 1992, just 
1% of the workforce. The average inflation rate for 1992 was over 1000% and the 
monthly increase in December was 27.7%. Nevertheless, the government is confident that 
it will soon achieve the programme objective of single^igit monthly inflation. 
Price Hberafizarion has progressed to the extent that all goods and services except 
household energy products and monopoly products are de-controlled. Privatization has. 
progressed relatively fast in Lithuania. The government is concerned, however, that 
rtffvafization has proceeded without sufficient attention to restructuring. Many firms are 
now effectively worker controlled, thus hindering rationalization and labour shedding. The 
government is, therefore, reviewing the privatization programme. 
In 1992, Lithuania's current account situation deteriorated considerably. One negative 
factor was the severe drought which adversely affected agricultural production, the import 
needs and the export potential of all three Baltic countries. In addition, Lithuania's current 
account suffered from the terms of trade shock induced by Russia whose export prices for 
Iithuania reached world market levels in Fall 1992. The current account, constrained by 
the lack of official financing in 1992, still appears to have been in surplus for the year as a 
whole, as does the trade balance; but there is a possibility that imports, mainly from 
former Soviet republics, were underreported. Gross national reserves had increased by 
$75 mio until the end of 1992. Apart from the Fund purchase of about $17 mio (1.1 % of 
GDP), there seems to be no other official foreign debt_ During the interstate negotiations 
on the FSU debt, Lithuania was assigned 1.41% of the overall debt, which it never 
recognized. Negotiations are stiil going on with Russia how this and other issues can be 
settled bilaterally. 
- 26 -
F. ALGERIA 
In a context of tight external reserve contraint, the authorities have implemented 
austerity measures, mostly through the introduction of new trade restrictions. As a 
result, in 1992, the country has entered in a situation of recession, and employment has 
grown, exœcding 20% according to official statistics. Price liberalisation measures, 
rising import prices stemniing from the dinar's depreciation during 1991 and the 
financing of the public sector deficit pushed up the inflation rate in 1992 to about 30% 
(compared to 16.6% in 1990). 
A stable exchange rate combined with a high inflation rate has imdcrmined the 
competitiveness of the domestic production and led the economic authorities to 
temporarily restrict certain imports. 
Algeria's external debt currently stands at US$ 25 billion, with a strong short-term 
component. Debt servicing and repayments exceeds 70% of the country's export 
earnings (mostly from oil and gas). However, Algeria has avoided requesting any 
multilateral debt moratorium or rescheduling, and is seeking additional bilateral 
financing tacflities. The stand-by arrangement approved by the IMF in June 1991 
became non-operational in early 1992. Negotiations on a new programme could begin 
soon. 
- 27 -
6 . ISRAEL 
In 1992, Israel has recorded its third straight year of strong growth. However, 
unemployment has risen to 11.5%, the highest level over the past two decades. The 
macro-economic situation improved substantially. Inflation declined to a single deficit 
and the budget deficit was substantially reduced. Exports of goods and services -
tourism, in particular - picked up. The performance of the economy has increased its 
international ratings. 
To finance the investment effort necessary to absorb the recent wave of immigration, in 
April 1992 Israel reveived an SDR 179 million Compensatory and Contingency Facility 
from the IMF. The American administration authorized a USS 10 buiion loan 
guarantee, which removed the constraint of a political shortage of foreign exchange as 
wdl as the problem of country limits and high borrowing costs. Gross external debt 
stood at US$ 33.8 billion (corresponding to 61% of GDP) at the end of 1991, while the 
debt service represented some 27% of exports down from 80 percent in 1985, a rather 
sound basis to undertake foreign borrowing to finance an investment programme. 
28 
H. FORMER SOVIET UNION 
The economic crisis in the former Soviet Union has grown increasingly acute during 
1992 Central planning has collapsed in most of the newly independent states. Trade 
between them has declined by an estimated 20-30%. Throughout most of the area, 
monetary conditions are chaotic, credit policy is lax and the financial system barely 
functions. Budgets are out of control, especially because of tax collection problems. 
Hard-currency exports have plummeted, resulting in external payments crises. As a 
result, output is declining rapidly (GDP is likely to have fallen by roughly 20%), and 
the region is very close to hyperinflation. Industrial restructuring and labour shedding 
have not really started; unemployment is still low. 
Far-reaching economic reform has begun in many republics, but progress has been un­
even. At the tegmning of the year Russia set the tone by launching a bold, if 
insufficiently comprehensive, reform programme. From the spring onwards, the pace 
of reform began to falter as domestic opposition mounted, in particular from the 
parliament and the powerful state enterprise sector. As a result, macroeconomic 
stabilization failed and the country drifted into hyr^rinflation. Legal, mstinitional and 
structural reform has advanced only slowly, although some progress was made with 
privatization. In Ukraine, economic policy has been determined mainly by nationalist 
forces intent on asserting independence from Moscow, who have neglected to introduce 
the legal and institutional framework necessary for a market economy. The goal of a 
separate Ukrainian currency and reticence towards the CIS should also be seen in this 
context. The government which came to power in October appears to be more strongly 
committted to reform, however. Some republics have made considerable strides in the 
transition to market-based systems: Kazakhstan and Kyrgyzstan are both close to 
concluding stand-by agreements with the IMF. In others, however, few efforts at 
reform have been made, or civil war is disrupting the economy more than any attempt 
at transition. 
The external financial situation of the area is extremely weak. This is particularly the 
case in the short run; in a longer run, the new states that have succeeded the Soviet 
Union present rather variable profiles. Some have considerable hard currency earning 
potential and industrial capacity; others are clearly close to developing countries and 
will therefore strongly depend on external assistance. 
The external financial situation of the NIS is largely determined by the developments in 
the Soviet Union since the late eighties and, at present, by the questions related to the 
settlement of the external debt problem. 
Since 1990, the only way the former Soviet Union was able to service its external debt, 
which was owed mainly to private creditors, was to cut back on imports and run down 
its gold and hard currency reserves. It made also an extensive cae of official and 
officially guaranteed credits provided by the main industrialized countries. However, in 
view of the growing difficulties in coUecting hard currency resources, and the 
withdrawal of credit lines with Western commercial banks, the Vneshekonombank of 
the still existing USSR had virtually to suspend payments at the end of 1991. In 
December 1991-January 1992, the authorities of the new states concluded agreements 
with official and private creditors of the Soviet Union on deferral of principal 
repayments on medium- and long-term credits contracted prior to 1991. The agreements 
were based on the acceptance by the states of the principle of "joint and several 
responsibility " for the debt servicing. 
Despite the deferrals, the former Soviet Union's hqmdhy crisis has not eased in 1992. 
Furthermore, the legal framework of the debt servicing based on the joint and several 
responsibility has not proved workable (Russia was the only state to make any actual 
payments), and significant arrears (some US$ 10 billion, including over US$ 2 billion 
- 29 -
in interest arrears), have been accumulated on non-deferred debt. As a result, the debt 
outstanding is now exceeding US$ 75 billion, up from US$ 67 billion in the end of 
1991. Following these developments, the case for a longer-term solution to the debt-
servicing problem has been gaining support At present, the Paris Club of official 
creditors is seeking such a solution in the form of a comprehensive debt rescheduling 
package œvering both principal and interest and possibly providing for some relief on 
payments due on credits extended in 1991 as well. 
The package is being negotiated with Russia which is increasingly viewed by the 
creditors as the sole successor of the Soviet Union, at least as regards its foreign 
liabilities. For rnonths, Russia has been seeking to take over all the former Soviet 
Union's foreign debt, in exchange of its assets, through aie so-called "zero-option* 
arrangements. Ukraine, the second largest former Soviet republic, has not agreed so far 
with this solution, thus making impossible a comprehensive debt rescheduling. 
30 
I . FORMER YUGOSLAVIA 
All successor republics to the former Yugoslavia are confronted with comparable 
problems: the transition to a market economy and to international competition, 
worsened by the collapse of Comecon trade, the effects of the war and the boycott of 
each other's trade, have resulted in a contraction of output, of employment, and 
increased inflation. The trade and current account deterioration is marked by the sharp 
contraction of imports (resulting from the drop in domestic activity). Furthermore, the 
widespread DM-ization of the inflationary economies and the provision of large-scale 
humanitarian aid (in the case of Croatia and Bosnia) make it particularly difficult to 
interpret balance of payments developments. 
The successor republics are in the process of discussing the division of internal and 
external assets and liabilities under the aegis of the Peace Conference in Geneva-
Yugoslavia's external debt amounting to US$ 16 bn has already been largely divided 
between the successor republics except for a federal part equal to US$ 3.1 billion, 
guaranteed by the National Bank of Yugoslavia, and largely owed to commercial banks. 
(The debt owed to commercial banks is equal to US$ 4.7 billion, to international 
organizations US$ 3.2 billion and to governments US$ 5.5 billion). 
The Yugoslav debt was rescheduled in 1988 by the London and Paris Clubs. The 
agreements included grace periods through 1993 and 1994, respectively. Until March 
1992, the entire debt was serviced by the National Bank of Yugoslavia and Slovenia for 
their respective parts in accordance with these agreements. The agreements will have to 
be renegotiated with each repubhc. 
Yugoslavia (Serbia and Montenegro') 
The Yugoslav economy and monetary system have practically collapsed doe to the 
catastrophic effects of the civil war and sanctions. Gross domestic product is estimated 
to have fallen by 20% in 1992 and by 35% since 1989. The central bank funds nearly 
all the federal budget by money issue and has consequently lost control of the money 
supply; inflation in 1992 reached 20,000%. Although the authorities have maintained 
an official exchange rate of 470 dinars to the DM since November 1992, the black 
market rate in late January was about 3,400 dinars to the DM. About one third of the 
2.3 million persons employed in social sector of the republic are currently on 
compulsory leave. All attempts at economic reform have been abandoned. 
During 1992, Yugoslav exports were approximately $2.5 bn (-46% over 1991) while 
imports reached US$ 3.9 bn (-33% over 1991). However the bulk of this trade took 
place before July 1992, when most countries began to apply on sanctions. Foreign 
exchange reserves stood at US$ 1.35 bn in December 1992, very near the minirnnm 
level prescribed by law. 
The combined foreign debt of the new repubhc is US$ 5.5 bn plus its share of the 
federal debt. In June 1992, the National Bank stopped servicing its debt to commercial 
banks. It continued however to make small payments to the IMF. 
- 31 
>> love ma. 
Slovenia was Yugoslavia's wealthiest and most mdustrialized republic. Output fell by 
9.3% in 1991, mostly due to a large drop in industrial production (-12.4%). This 
decline has continued at about the same magnitudes in 1992 but production is expected 
to stabilize in 1993. Retail prices during the first ten months of 1992 rose by 240% 
over the same period in 1991 but the monthly rate has now dropped to 3%. 
Unemployment was 12.7% of the labour force in October 1992. 
Since independence, Slovenia has implemented drastic economic reforms. Prices and 
foreign exchange operations have been liberalized, the banking sector deregulated and 
the fiscal system completely restructured. Following a long debate in Parliament, a 
privatization law was passed in November 1992. 
Slovenia has introduced its own currency and has maintained rigourous monetary and 
fiscal policies. Foreign currency reserves have more than tripled during 1992, reaching 
US$ 1.4 bn in November 1992. The country has also nimimized the negative 
consequences of the loss of the internal Yugoslav market by successfully reorienting its 
foreign trade activity. During the first ten months of 1992 there was a small trade 
deficit (US$ 92 rnillion) but a current account surplus of US$ 828 million. 
Slovenia's share of the Yugoslav foreign debt is US$ 1.7 bn, not including its part of 
the federal debt The repubhc had continued to service its debt without mterruption 
until May 1992. In June it refused to make payments to banks as long as the latter were 
referring to payments by Yugoslavia as a whole and were not explicitly acknowledging 
that Slovenia had paid its own share in the debt by itself. In November 1992, Slovenia 
regularized its situation. Banks are now begmrrmg to negotiate with Slovenia on the 
servicing of the latter's part in the federal debt on the basis of the allocation of a part of 
the Yugoslav quota in the IMF to Slovenia (± 17%). 
Croatia 
Croatia's economic performance continues to be adversely affected by the civil war. 
One third of its territory is occupied and the œuntry is flooded by Croatian and Bosnian 
refugees. The tourist industry has come to a standstill. GDP declined by 32.4% during 
the first eight months of 1992, following a 23-4% drop in 1991. This is mainly due to 
the fall in mdustrial production and in tourism. Retail prices rose by 655% during the 
first ten months of 1992 over 1991; recently inflation has been on an accelerating trend. 
The rate of unemployment reached 17.8% at the end of 1992. 
Economic reforms were at a very early stage when civil war broke out The 
privatization law enacted in May 1991 has been widely criticized as inadequate, and 
there is an urgent need to streamline the country's inefficient fiscal system. 
Croatia showed a US$ 0.3 bn trade deficit in 1992 (US$ 0.4 bn in 1991). Foreign 
exchange reserves at the Central Bank stood at only USS 170 million in the end of 
1992. 
The external debt is valued at US$ 2.7 bn plus Croatia's share in the USS 3,1 bn 
federal debt. As of May 1992, Croatia ceased to service its share of the debt, alleging 
that part of it had been purchased on the secondary market by Serbia. Croatia is 
presently trying to convince the commercial banks to form another consortium and 
discuss the renegatiation of the outstanding debt and arrears on payments of interest 
Maœdûûia's i0t2^ debt ^ valued at somc us$ * Dn and Bosnia-Herzegovina's total debt 
at US$ 2 bn. 
- 32 -
TABLE 1 
CAPITAL OUTSTANDING IN RESPECT OF OPERATIONS DISBURSED 
(ECU million) 
Operation Authorized 
ceiling Amount 
outstanding 
30.6.1992 Amount 
outstanding 
31.12.1992 
MEMBER STATES 
A. Balance of payments 14000 
1. Greece I 
2. Greece II 953 
1000 875 
1000 
siB. Other 
3. Euratom 4000 
4. *NCI and 
NCI earthquakes 6830 
5. ErB Mediterranean, 
Spain, Greece, Port. 1500 
THIRD /COUNTRIES 1452 
3502 
676 1338 
3326 
645 
Financial assistance 
1. tBungary 1050 
2. Chechoslovakia 1 375 
3. Bulgaria 1 290 
4. Romania 375 
5* Algeria 4?00 
6. Israel 160 
8. Former Soviet Union 1250 710 
375 
290 
375 
250 
160 710 
375 
290 
375 
250 
160 
123 
B. Other 
9. EIB Mediterranean 6017 
10. EIB Central and 
Eastern Europe 1700 
11. Guarantee, CIS 500 1358 
60 
408 1444 
147 
375 
TOTAL 38447 11569 11433 
(Community) 
(non-Commun ity) 26330 
12117 7583 
3986 7184 
4249 
- 33 -
MAXI 
(Estimate in ECU mi TABLE 2 
MUM ANNUAL RISK BORNE BY THE COMMUNITY BUDGET 
11 ion based on all operations disbursed at 31 December 1992) 
MEMBER STATES 
CAPITAL 
A.Balance of payments 
1. Greece 
B.Structural loans 
2. Euratcu 
1 3.NCI and NCI EQ 
; 4.EIB Med.Old Prot. 
Sp. G . Port. 
Capital - subtotal 
INTEREST 
A.Balance of payments 
1. Greece 
B.Structural loans 
2. Euraton 
3. NCI and NCI EQ 
4.EIB Med.Old Prot. 
Sp. Gr. Port. 
Interest - subtotal i 
MEMBER STATES-TOTAL 
< 
i»N-MEMBER COUNTRIES 
! CAPITAL 
'A. Financial assistance 
5. Hungary 
6.Czechoslovakia 
7.Bulgaria 
8.Romania 
9.Algeria 
10. Israel 
11. Ex USSR 
B. Guarantees 
12.EIB Med. 
13. EIB C+E Eur. 
14. Aid, Russia 500nj 
Capital-subtotal 
INTEREST 
A.Financial assistance 
5. Hungary 
6.Czechoslovakia , 
7.Bulgaria 
g. Romani a 
9.Alger in 
10. Israel 
11.Ex USSR 
B. Guarantees 
12.EIB Med. 
13.EIB C+E Eur. 
14.Aid, Russia 500m 
Interest-subtotal 
NON-MEMBER COUNTRIES- TOTAL 
GRAND TOTAL 
(Eastern Europe) 
(Other non-member 
countri es ) 1992 
650 
287 
624 
105 
1866 
349 
138 
358 
67 
912 
2778 
96 
96 
73 
36 
15 
22 
16 
112 
4 
10 
288 
AL384 
3162 
138 
246 199) 
522 
350 
1166 
100 
2118 
144 
no 
294 
57 
605 
2743 
105 
125 
230 
71 
38 
29 
38 
25 
16 
12 
110 
11 
37 
389 
619 
3362 
Î63 
256 
... 1994 
200 
99 
651 
86 
1036 
110 
79 
185 
48 
422 
1458 
121 
2 
125 
248 
73 
38 
29 
38 
25 
16 
12 
102 
11 
25 
369 
617 
2075 
353 
264 1995 
44 
486 
76 
606 
95 
71 
1)0 
40 
336 
942 
350 
12) 
126 
10 
125 
734 
73 
36 
29 
3B 
25 
16 
12 
92 
11 
11 
345 
1079 
2021 
820 
259 1996 
500 
152 
314 
79 
1045 
95 
67 
90 
33 
285 
1)30 
260 
122 
15 
397 
36 
38 
29 
38 
25 
16 
82 
10 
274 
671 
2001 
426 
245 1997 
575 
525 
73 
1173 
46 
55 
64 
26 
191 
1)64 
190 
140 
250 
160 
123 
16 
879 
10 
38 
29 
)8 
25 
16 
73 
9 
238 
1117 
2481 
470 
647 1998 
5C0 
91 
90 
72 
753 
46 
1C 
16 
20 
92 
845 
1C0 
185 
150 
185 
125 
16 
761 
10 
!9 
15 
18 
64 
8 
154 
915 
1760 
726 
189 1999 
16 
39 
55 
110 
3 
8 
15 
26 
136 
190 
119 
15 
324 
19 
54 
7 
80 
404 
540 
231 
173 TOTAL 
2372 
1614 
4095 
646 
8727 
885 
533 
1145 
306 
2869 
11596 
710 
375 
290 
375 
250 
160 
12) 
937 
74 
375 
3669 
348 
245 
175 
247 
147 
96 
36 
689 
71 
83 
2137 
5806 
17402 
3527 
2279 
- 33 «*-- -
TABLE 3 
MAXIMUM ANNUAL RISK BORNE BY THE COMMUNITY BUDGET 
(Estimate in ECU million based on all operations - disbursp«<»n+c J„,.:C;„„, „ J » -, \ 
y v uisoursements, decisions and Commission proposals) 
MEMBER STATES 
CAPITAL 
A. Balance of payments 
! ;. Greece 
| 2. Italy 
B.Structural loans 
?. EuratOG • NCI 
3.EIB Sp. Gr. Port. 
Capital-subtotal 
INTEREST 
A. Balance of payments 
i.Greece 
2.Italy 
B. Structural loans 
2. Euralc» + NCI 
3. EIB Sp. Gr. Port. 
Interest-subtotal 
MEMBER STATES-TOTAL 
NON-MEMBER COUNTRIES 
CAPITAL 
A.Financial assistance 
4. Hungary 
5. Czechoslovakia 
6. Bulgaria 
7. Romania 
8. Israel 
9. Algeria 
10. Ex USSR 
11. Baltic States 
12. Euratom, C+E Eur. 
B.Guarantees 
13. EIB Med. 
14. EIB C+E Eur. 
15. EIB, other third countries 
Capital-subtotal 
INTEREST 
A.Financial assistance 
4. Hungary 
5. Czechoslovakia 
6. Bulgaria 
7. Romania 
8. Israel 
9. Algeria 
10. Ex USSR 
11. Baltic States 
12. Euratom, C+E Eur. 
B. Guarantees 
13. EIB Med. 
14. EIB C+E Eur. 
15. EIB, other third countries 
Interest-subtotal 
NON-MEMBER COUNTRIES-TOTAL 
GRAND TOTAL 
(Eastern Europe) 
(Other non-meKBér countries) 199) 
522 
1516 
100 
2138 
144 
100 
404 
57 
705 
2843 
105 
125 
230 
81 
38 
35 
42 
16 
12 
60 
11 
144 
15 
37 
511 
741 
3584 
444 
297 1994 
200 
750 
86 
ÎC36 
170 
500 
264 
48 
982 
2018 
146 
121 
2 
125 
394 
107 
38 
40 
46 
16 
40 
125 
22 
30 
177 
42 
1 
25 
709 
1103 
31?1 
748 
355 1995 
530 
79 
109 
215 
7CC 
201. 
*0 
1156 
Ï765 1996 
500 
466 
73 
1039 
215 
800 
157 
33 
1205 
2244 1997 
1101 
72 
1173 
168 
800 
119 
26 
111) 
2266 
! ! 
350 
929 
•26 
10 
125 
1540 
107 
3S 
40 
46 
16 
40 
88 
22 
52 
232 
85 
4 
11 
781 
2)21 
4086 
1903 
418 260 
175 
158 
37 
630 
70 
38 
40 
46 
16 
40 
10 
22 
72 
311 
132 
12 
809 
1439 
3683 
902 
537 80 
190 
140 
160 
250 
215 
75 
) 
HI) 
44 
38 
40 
46 
16 
40 
22 
92 
176 
160 
78 
902 
. 2015 
4301 
927 
1088 ' 1998 1999 
I 
i 
noo ! 
! 4000 
t 
181 ! 55 
55 | 49 
Î336 | 4104 
168 
300 
26 
20 i 
j 
60 
700 
11 
15 
1014 786 
2349 | 4890 
i 
360 
185 
150 
185 
20 
293 
114 
10 
• 
1317 
36 
19 
26 
46 
15 
22 
112 
427 
162 
47 
912 
2229 
4578 
1437 
792 190 
35 
354 
140 
23 
742 
11 
27 
15 
22 
110 
445 
157 
61 
848 
1590 
6480 
692 
898 2000 
600 
2000 
51 
44 
2695 
60 
300 
6 
11 
377 
3072 
55 
80 
150 
220 
48 
404 
146 
40 
1143 
11 
8 
15 
22 
107 
432 
146 
66 
807 
1950 
5022 TOTAL 
2922 
6C00 
4649 
558 
Î4Î29 
1200 
4700 
1189 
250 
7339 
21468 
1050 
375 
345 
455 
160 
400 
1250 
220 
103 
1776 
524 
76 
375 
7109 
445 
209 
' 243 
307 
80 
237 
283 
165 
575 
2544 
899 
219 
73 
6279 
13388 
34856 i 
84) | 7896 ! 
1107 | v.r; | 
-34-
EXPLANATORY NOTES 
The purpose of these tables is to show the annual repayments of capital and 
interest in respect of borrowing and lending operations for which the risk 
is covered by the Community budget. The figures show the maximum possible 
risk for the Community in respect of these operations and must not be read 
as meaning that these amounts will actually be drawn from the budget. In 
the case of Table 3, it is not certain that all the operations described 
will actually be disbursed. No account has been taken of interest on late 
payment or any additional costs such as lawyers' fees. 
I. TYPES OF OPERATION AND PAYMENT OF THE BUDGET GUARANTEE 
A. Types of operation 
The risk covered by the Community budget results from two types of 
operation: 
- borrowing/lending operations; 
- guarantees given to third parties. 
In the first type of operation, the Community borrows on the financial 
market and on-lends the proceeds (at the same rate and for the same term) 
to Member States (balance of payments), non-member countries (medium-term 
financial assistance) or firms (NCI, Euratom). 
The loan repayments are scheduled to match the repayments of the borrowings 
due from the Community. If the recipient of the loan defaults, the 
Commission must draw on its budgetary resources to repay the borrowing on 
the due date. 
The loan guarantee is in respect of loans granted by a financial 
institution (EIB or commercial banks in the case of the former Soviet 
Union). When the recipient of a guaranteed loan fails to make a payment on 
the due date, the bank asks the Commission to pay the amounts owed by the 
defaulter. 
-35-
B. Mobilization of funds 
The funds needed can be raised by re-using amounts repaid or by means of 
transfers. 
The re-use of amounts repaid by debtors allows payments to be made within a 
short period of time always providing, of course, that there are funds 
available for re-use. 
Where there are insufficient funds for re-use or insufficient time for a 
transfer, the amount required will be taken provisionally from cash 
resources with an adjustment being made later by means of a transfer and/or 
a supplementary/amending budget as appropriate. 
II. CALCULATION 
Some of the amounts indicated are the result of estimates made on the basis 
of the following assumptions. 
Generally speaking, the exchange rates for loans in currencies other than 
the ecu are assumed to have been stable since 31 December 1992. However, 
borrowing and lending operations should not involve exchange risks for the 
Community. Unless otherwise stated, the average rate of interest is 
estimated at 10%. This rate is probably a little high for EIB loans, which 
often attract interest subsidies under the protocols. 
A. Member States 
1. Greece I; The figures for repayments of capital and fixed-rate 
interest are final and certain. 
2. Greece II; A total of ECU 2.2 billion has been granted with a first 
tranche of ECU 1 billion. This first tranche is repayable as follows: 
ECU 500 million in 1996 and ECU 500 million in 1998. It is assumed 
that the second tranche of ECU 600 million will be paid out in 1993 
with a term of six years. It is assumed that the third tranche of 
ECU 600 million will be paid out in 1994 and will also run for a term 
of six years. 
3. EIB, Mediterranean, old protocols; Spain, Greece, Portugal: These 
are Community guarantees for EIB operations in these countries prior to 
accession. The amounts are now final, since all the loans authorized 
have been disbursed. 
-36-
B. Non-member countries 
a. Financial assistance 
1. Hungary I; The amounts and rates for the first two tranches are final 
and certain. It is assumed that the third tranche will be paid in 
1993. 
2. Hungary II; ECU 180 million has been granted in two tranches, with a 
first tranche of ECU 100 million. 
3. Czechoslovakia: ECU 375 million has been granted in two tranches for a 
maximum term of seven years (bullet), with a first tranche of 
ECU 185 million and a second tranche of ECU 190 million for a term of 
six years. 
4. Bulgaria: ECU 290 million has been granted in two tranches for a 
maximum term of seven years (bullet), with a first tranche of 
ECU 150 million and a second tranche of ECU 140 million for a term of 
six years. 
It is assumed that the new operation (ECU 110 million for a maximum 
term of seven years to be paid in two tranches) will be disbursed in 
full in 1993. 
5. Romania: An estimated ECU 375 million in two tranches for a maximum 
term of seven years (bullet). The first tranche of ECU 190 million was 
disbursed with a term of seven years and the second was disbursed in 
1992 with a term of six years. 
It is assumed that the new operation (ECU 80 million for a maximum term 
of seven years) will be disbursed in 1993. 
6. Baltic States 
It is assumed that this loan of ECU 220 million will be paid in full in 
two tranches in the course of 1993 and repaid in one tranche seven 
years later. 
7. Algeria; ECU 400 million has been granted in two tranches of 
ECU 250 million and ECU 150 million. The first was paid in 
December 1991 for a term of six years: it is assumed that the second 
will be paid in 1993 for a term of six years. 
8. Israel: The Council (Economic and Financial Affairs) has decided on a 
borrowing/lending operation for ECU 160 million. The loan was paid in 
one tranche in 1992 for a term of six years. 
- 37 -
b. Guarantees 
1. EIB Mediterranean 
Figures provided by the EIB for loans disbursed at 31 December 1992. 
For the others, we have made the following assumptions concerning the 
signature of loans. 
Year 1993 1994 1995 1996 TOTAL 
Mediterranean countries 800 850 800 755 3205 
Central and Eastern Europe 800 110 110 110 1130 
Other non-member countries 50 150 250 250 700 
In the case of these loans and those already signed at the end of 1992 but 
not yet disbursed (ECU 1 043 million for the Mediterranean countries and 
ECU 566 million for the countries of Central and Eastern Europe), we have 
assumed that an average of 10% of the loan will be disbursed in the year of 
signature and 30% in each of the three following years. 
It is estimated that the average term will be fifteen years with a 
three-year period of grace. 
2. Food aid for the former Soviet Union 
(a) Guarantee 
This is a guarantee for a bank loan of ECU 500 million, fully covered by 
the budget, with a term of three and a half years with three repayments at 
intervals of eleven months starting from the twentieth month. 
(b) Borrowing/lending 
An operation involving ECU 1 250 million for a maximum term of three years. 
This borrowing will be divided between the various Republics of the former 
Soviet Union. Borrowings amounting to less than ECU 100 million will be 
repaid in one instalment three years after the start of the period in which 
the funds may be drawn. Borrowings exceeding ECU 100 million will be 
repaid in two instalments two years and three years after the start of the 
period in which the funds may be drawn. 
Depending on the type of contract, there are two periods in which funds may 
be drawn; one starts on 20 October, the other on 15 July. 
- 38 -
3. Euratom, countries of Central and Eastern Europe 
Of the ECU 1 124 million involved, it is assumed that ECU 300 million 
will be disbursed in 1993, ECU 224 million in 1994 and ECU 200 million 
in each of the three following years. 
It is assumed that the loans will be for an average term of twenty 
years with a five-year period of grace. 
-39-
ANNEX 
DEFINITION OF FIGURES USED IN THE REPORT 
A. Authorized ceiling (Table 1) 
This is the aggregate of the maximum amounts of capital authorized 
(ceilings) for each operation decided or of the amount proposed by the 
Commission for operations for which there has not yet been a Council 
decision. 
In order to relate it to the risk which the budget might have to cover, 
account should be taken of the interest, which would increase the figure, 
and of three factors which would reduce it: 
— limitation of the guarantee given to the EIB to 75% of the loans signed 
in the Mediterranean countries; 
operations already repaid, since the amounts concerned, except in the 
case of balance of payments support, are the maximum amount of loans 
granted- and not outstanding amounts authorized; 
the amounts authorized are not necessarily taken up in full. 
The breakdown of authorizations is as follows: 
Member States 
Balance of payments 14 000 * 
NCI 6 830 
Euratom 4 000 2 
EIB; Spain, Greece, Portugal 1 500 
Member States - total 26 330 
Authorized amount outstanding: once this figure is reached, further 
loans may be granted as previous operations are repaid. 
Including ECU 1 124 million which may be granted to the countries of 
Eastern Europe and the CIS. 
-40-
Non-member countries 
Hungary I 
Hungary II 
Czechoslovakia 
Bulgaria I 
Bulgaria II 
Romania I 
Romania II 
Israel 
Algeria 
former Soviet Union I 
former Soviet Union II 
Baltic States 
EIB, old protocols 
EIB, Eastern Europe 
EIB, Baltic States 
EIB, Albania 
EIB, new protocols 
EIB, horizontal cooperation 
Other non-member countries 870 
180 
375 
290 
110 
375 
80 
160 
400 
408 
250 
220 
032 
700 
200 
50 
185 
800 
750 
Non-member countries - total 13 185 
Grand total 40 015 
B. Amount outstanding (Table 1) 
This is the amount of capital still to be repaid on a given date in respect 
of operations disbursed. 
Compared with the previous aggregate, the amount outstanding does not 
include loans which have not yet been disbursed nor the proportion of 
disbursed loans which have already been repaid. It may be described as the 
amount of loans which exist on a given date. 
C. Annual risk 
Estimated amount of principal and interest due each financial year. 
- 41 -
This amount is calculated for: 
disbursements alone (Table 2), in which case the capital to be repaid 
corresponds to the amount outstanding; 
disbursements, decisions still awaiting disbursement and Commission 
proposals still awaiting decisions (Table 3), in which case the capital 
to be repaid corresponds to the ceiling on loans authorized plus, where 
applicable, the amounts in respect of operations proposed by the 
Commission and not yet decided and the amount still to be used for 
balance of payments operations which are much less likely to be called 
on than the other types of assistance. 

-HZ, -
ISSN 0254-1475 
COM(93) 174 final 
DOCUMENTS 
EN 01 
Catalogue number : CB-CO-93-201-EN-C 
ISBN 92-77-55223-9 
Office for Officiai Publications of the European Communities 
L-2985 Luxembourg