EUROPEAN COMMISSION Brussels, 5.11.2021 COM(2021) 676 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL









on financial instruments, budgetary guarantees, financial assistance and contingent liabilities





Situation at 31 December 2020































Table of Contents 1.Introduction 2.What are contingent liabilities? 3.Contingent liabilities arising from provisioned instruments: budgetary guarantees and financial assistance to third countries 3.1.Overview of the total EU risk exposure at the end of 2020 3.2.The EU risk management system for provisioned contingent liabilities 3.2.1.Budgetary guarantees 3.2.2.Financial assistance to third countries 3.3.European Commission common framework for managing and monitoring provisioned contingent liabilities 4.Contingent liabilities arising from financial assistance to Member States 4.1.Overview of total EU risk exposure at the end of 2020 4.2.The EU risk management system for contingent liabilities arising from financial assistance to Member States 5. Assessing the sustainability of EU contingent liabilities 5.1. Assessment Framework 5.2. Assessment of the sustainability of the provisioned contingent liabilities 5.3. Assessment of the sustainability of the contingent liabilities in respect of the limits of the Own Resources ceiling 6.Conclusions Annex: Sustainability and headroom in respect of the permanent Own Resources ceiling

1.Introduction This is the first report in accordance with the requirements of Article 250 of the Financial Regulation. It has been prepared in conjunction with: -Working Documents X and XI, accompanying the Draft Budget 2022, which provide detailed information on the EU financial instruments and budgetary guarantees; and -The Long-term forecast report on future inflows and outflows of the EU budget, which gives projections for the available financial capacity of the EU over 2021-2027 after planned budget expenditures are considered. The objective of this document is to provide an overview of the contingent liabilities borne by the EU budget as of 31 December 2020 and of the panoply of measures and safeguards which the Commission has at its disposal to fully protect the EU budget from potential losses originating from those liabilities. After a general introduction on the definition and sources of contingent liabilities, the report depicts the key features of the two categories of contingent liabilities (provisioned and un-provisioned) with particular regard to the analysis of the EU framework for the monitoring and management of the risks arising from contingent liabilities. Finally, the report provides an assessment of the sustainability of the Union contingent liabilities in the long-term, based on qualitative and quantitative factors. The assessment is performed: -Against the amount of existing provisions held in the guarantee funds set by the Commission for budgetary guarantees and financial assistance to third countries; -Against the limits of the Own Resources ceiling and the available headroom for un-provisioned contingent liabilities stemming from financial assistance to Member States. The main conclusion of the sustainability analysis is that the EU budget has in principle adequate resources to cope with the potential materialisation of contingent liabilities. In particular: -No under-provisioning issues are identified for contingent liabilities arising from budgetary guarantees and financial assistance to third countries; -The EU financial capacity under the existing legal framework (i.e. Own Resources Decision and Multiannual Financial Framework (MFF) 2021-2027 Regulation) is sufficient to cover the existing obligations of the Union in relation to both spending programmes and financial markets (for debt issued under financial assistance programmes to Member States), even under extreme adverse circumstances. This report covers contingent liabilities incurred prior to the end of 2020, and assesses how they are catered for under the MFF 2021-2027. It therefore does not cover contingent liabilities arising from NextGenerationEU (NGEU) which have only started to materialise during the course of 2021, and for which an additional financial capacity has been established through a temporary increase of the Own Resources ceiling. 2.What are contingent liabilities? Contingent liabilities are potential financial liabilities of the EU, which stem from existing binding commitments or past events. Whether or not these contingent liabilities will lead to actual losses, will depend on future events not wholly under the control of the EU. For the EU, there are three main sources of contingent liabilities: -Budgetary guarantees, which are guarantees provided to the European Investment Bank (EIB) Group or other implementing partners under the European Fund for Strategic Investments (EFSI) mandate, the European Fund for Sustainable Development (EFSD) mandate and the External Lending Mandate (ELM). Under all these instruments, the EU (partially) guarantees implementing partners for the losses emanating from their guaranteed financing and investment operations (i.e. debt or equity operations). Under the MFF 2021-2027, the InvestEU programme pools under the umbrella of a single EU guarantee the activities previously deployed under EFSI and several other financial instruments and has opened up access to a portion of the EU guarantee to pillar-assessed implementing partners other than the EIB Group . In a similar manner, the EFSD has been succeeded by the EFSD+, established by the Neighbourhood, Development and International Cooperation Instrument (NDICI) – Global Europe Regulation and which now acts as the financing arm of a reinforced External Investment Plan. -Loans and related borrowings to provide financial assistance to third countries (i.e. Macro Financial Assistance (MFA) loans and Euratom loans to third countries) that is in principle financed through ‘back-to-back’ borrowing operations. Concretely this means that each loan is funded through a corresponding EU bond, which fully matches the EU loan in terms of maturity, interest rate and repayment schedule. As a result, investors in EU bonds are only exposed to the EU credit risk and not to the credit risk of each single beneficiary country. For the EU, the liability is contingent since no outflow of EU resources is in principle required for settling the EU debt, the beneficiary country being contractually obliged to supply the revenue flow. -Loans and related borrowings to provide financial assistance to EU Member States, i.e. Balance of Payments (BoP) loans, European Financial Stabilisation Mechanism (EFSM) loans, Euratom loans and loans under the European instrument for temporary support to mitigate unemployment risks in an emergency (SURE). These loans are granted to EU Member States under the same back-to back technique as the financial assistance to third countries . The revenue from repayments from the beneficiary Member States is channelled to service the EU debt. It does not count as own resources under the respective Own Resources ceiling.

Contingent liabilities arising from budgetary guarantees and from financial assistance to third countries are partially provisioned and the provision calculations are based on conservative assessments of the expected losses for each instrument plus an additional margin to cover a portion of the unexpected losses. By contrast, contingent liabilities stemming from financial assistance to EU Member States are not provisioned. Borrowings of the EU constitute direct and unconditional obligations of the EU. Therefore, in case a beneficiary Member State would fail to honour its obligations towards the EU, the EU is entitled, as a last resort having exhausted all other possibilities to find solutions within the existing budgetary framework, to draw the necessary liquidity from the other Member States. Such calls for revenue would be made over and above the MFF ceilings, while respecting the Own Resources ceiling. At the end of 2020, the EU budget included contingent liabilities amounting to over EUR 93 billion in relation to loans granted to Member States and third countries and approximately EUR 63 billion for the guarantees provided in the context of EFSI, EFSD, and ELM. The largest exposure for the EU budget originates from financial assistance programmes targeting Member States (See Figure 1 below). Under the MFF 2021-2027 the use of budgetary guarantees is expected to further increase through, inter alia, the InvestEU programme which includes a EUR 26.2 billion guarantee to support investment operations in four policy windows (sustainable infrastructure, research, innovation and digitalisation, SMEs, and social investment and skills). By the end of 2021, the Union is expected to significantly increase its contingent liabilities also in relation to the borrowing undertaken to finance NGEU’s Recovery and Resilience Facility loans to Member States. The results of those operations will be included in the next edition of the present report.



(*) Based on the total amount of “available guarantee signed with counterparts” (See table 1 below). In accordance with EU accounting rules, financial instruments in the form of guarantees are classified as contingent liabilities , however, they are not a source of contingent liabilities from a budgetary perspective since they are always fully provisioned by the budget, i.e. the budget has foreseen commitments to meet the full amount of the contingent liability arising from the financial instrument. There is full assurance that the entirety of the commitment can be honoured in the extreme scenario that this would be warranted as it already forms part of the outstanding commitments of the Union. The EU budget funds a large variety of financial instruments (equity, debt, loan guarantees, venture capital, capacity building and risk sharing facilities). These are classified in two main categories: those related to internal policy actions and those related to external policy actions (depending on whether the recipients are predominantly located in or outside the EU). Examples of financial instruments are the instruments established under Horizon 2020 to enhance access to finance to entities engaged in research and innovation, the Connecting Europe Facility debt instrument, which has been established to facilitate infrastructure projects (in the sectors of transport, telecommunications and energy), and the EU SME equity facilities that support the creation and financing of EU SMEs in their early and growth stages. Working Document X accompanying the Draft 2022 budget provides a detailed description of all the thirty-six existing financial instruments. 3. Contingent liabilities arising from provisioned instruments: budgetary guarantees and financial assistance to third countries 3.1. Overview of the total EU risk exposure at the end of 2020 The EFSI was launched in 2015 to remedy the problem of prolonged subdued private investment following the financial crisis. It takes the form of a EUR 26 billion budgetary guarantee from the EU budget to the EIB Group. It is complemented by an allocation of the EIB’s own resources of EUR 7.5 billion. The guarantee under the EFSD was put in place to support investments and improve access to finance primarily in Africa and the Neighbourhood countries and to help those countries to meet the UN Sustainable Development Goals.



Available guarantee signed with counterparts Available guarantee related to operations signed by counterparts Available guarantee related to operations signed by counterparts and disbursed EFSI 25 833.27 24 121.52 18 880.06 EFSD 1 370.7 438. 56 34.52 ELM 35 574.71 32 732.34 20 252.21 Total 62 778.68 57 292.42 39 166.78

Outstanding loans Accrued interests Total MFA 5 786.80 26.17 5 812.97 Euratom 200 0.5 200.5 Total 5 986.80 26.67 6 013.47 3.2. The EU risk management system for provisioned contingent liabilities Title X of the Financial Regulation provides the foundation of the EU framework for the management of contingent liabilities, as it includes a number of key provisions to ensure that the EU budget is adequately protected from the risks associated with those liabilities. To make sure that the EU is at any time able to honour fully, and in a timely manner, calls on the budgetary guarantees by implementing partners or to repay bonds where the loan beneficiary has defaulted, a number of risk management mechanisms and tools have been put in place. Some of those are horizontal and apply to all categories of contingent liabilities, others are more specific and relate either to budgetary guarantees or to financial assistance programmes. 3.2.1. Budgetary guarantees The safeguards put in place to ensure that contingent liabilities arising from budgetary guarantees do not exceed the budgetary capacity to absorb them are described in the present section. Measures to limit the amount of the contingent liabilities First, the size of the EU guarantee is always capped in a clearly defined manner. The Financial Regulation states that the financial liability and the aggregate net payments from the budget cannot exceed the size of the budgetary guarantee, authorised by its basic act. The contingent liability generated by a budgetary guarantee can only exceed the financial assets provided to cover the EU financial liability if this is provided for in the underlying basic act and under the specific conditions it sets. Secondly, the risk profile of the operations/financial products guaranteed by the EU is determined ex ante, i.e. at the time of the signature of the guarantee agreements. It shall be fully compatible with the provisioning rate as determined in the regulation governing the relevant guarantee and the risk appetite that has been set for the programme. Where appropriate, the operations will strive for diversity (geographic scope, sectors, etc.) in order to avoid excessive risk concentrations. Measures concerning the selection of implementing partners Prior to becoming an implementing partner in the context of an existing guarantee programme, candidate institutions are subject to a ‘Pillar Assessment’, i.e. a thorough review of their internal processes and applicable procedures in order to assess their capacity to guarantee a level of protection of the EU financial interests equivalent to that required under the Financial Regulation . Moreover, existing guarantee agreements include provisions to make sure that: (I)Implementing partners contribute with their own resources to the operations covered by the budgetary guarantee, and; (II)Adequate mechanisms are in place to ensure that a portion of the risk of losses is borne by the implementing partners (risk sharing) or alternatively that other financial incentives are introduced to secure sufficient alignment of interests. Implementing partners are also requested to put in place adequate measures to prevent any potential conflict of interests with other activities they might carry out as part of their ordinary business. Measures to ensure adequate ex-ante budgetary capacity to absorb guarantee calls For budgetary guarantees, the Financial Regulation requires upfront provisioning based on a provisioning rate, which is determined in such a manner that it covers guarantee calls to the level of expected losses plus a ‘safety’ buffer to cope with a portion of unexpected losses . The provisioning rate is set in the basic act and is expressed as a percentage of the total amount of the EU guarantee. The rate is subject to regular monitoring during the implementation of the programmes and is, if appropriate, reviewed to ensure continued alignment with the evolution of the risk profile of the outstanding liabilities.

The Commission has specific measures at its disposal to ensure a continued adequate level of provisioning. These are based on an early warning system that helps to avoid a potential exhaustion of the provisioning and that, if needed, can trigger a replenishment of the provisioning and/or an increase of the provisioning rate as provided for in the legal basis . Replenishments, when and if required, are implemented through the normal annual budgetary procedure. Unlike the potential repayments in relation to financial assistance to Member States, the replenishments for budgetary guarantees count within the limits of the MFF ceilings for commitments and payments appropriations. In order to mitigate the risk of the impact that guarantee calls from implementing partners could have on the EU budget, the EU has historically created dedicated guarantee funds funded by the EU budget. At 31 December 2020, the total amount of financial assets held in these three funds stood at: -EUR 8.0 billion for the EFSI Guarantee Fund; -EUR 2.8 billion for the Guarantee Fund for External Action (GFEA) which holds the provisions for the ELM, MFA and Euratom programmes; -EUR 0.8 billion for the EFSD Guarantee Fund. Since January 2021, the assets held in the three provisioning funds have been brought together in one Common Provisioning Fund (CPF) , which now holds the provisions to cover the potential financial liabilities arising from budgetary guarantees and financial assistance programmes to third countries in one investment portfolio (comprising separate compartments to respond to guarantee calls from the respective guarantee programmes). Upon entry into force of the 2021-2027 MFF, the CPF received the assets of the EFSI Guarantee Fund, which was followed by the transfer of the net assets of the GFEA and of the EFSD Guarantee Fund in the summer of 2021, as established by the Regulation establishing the Neighbourhood, Development and International Cooperation Instrument (NDICI) – Global Europe programme. Going forward, also the provisions of the new instruments under the 2021-2027 MFF (i.e. the InvestEU and NDICI-Global Europe programmes) will be managed via the CPF. Measures to deal with realised losses exceeding the available provisioning If at any moment during the implementation of the programme, the provisioning should prove insufficient to cover the actual losses, the following measures can be activated: -Exceptional temporary transfers between provisioning compartments underpinning different budgetary guarantees in the CPF, i.e. to deal with a shortage of funds to pay guarantee calls under a budgetary guarantee, the assets provisioned under another budgetary guarantee can be temporarily made available; -Exceptional additional expenditures to be approved through: ·Redeployment of expenditure (commitment and payment appropriations) from other items within the EU budget; and/or ·Amendment of the EU budget to allow for additional expenditure (within the limits of the MFF ceilings and flexibility mechanisms); - Use of central treasury: in exceptional cases liquidity of the central treasury may be temporarily used to pay guarantee calls of a budgetary guarantee awaiting the approval of additional budgetary resources. 3.2.2. Financial assistance to third countries Measures to limit the amount of the contingent liabilities In a similar manner as for budgetary guarantees, the Financial Regulation limits the total exposure of the EU budget in relation to financial assistance programmes. The contingent liability shall only exceed the financial assets provided to cover the financial liability of the Union if provided for in the underlying basic act and under the conditions set out therein. Moreover the financial liability and aggregate net payments from the budget shall never exceed the maximum amount of funds that the Commission is empowered to borrow for funding the financial assistance and the relevant interest. For each programme, the corresponding legislative act determines the overall granted amount, the number of instalments to be disbursed, and the maximum maturity of the loan package. Instalments usually depend on compliance with a number of policy conditions including, in some cases (e.g. MFA loans), a satisfactory track record of implementing International Monetary Fund (IMF) programme reforms.

Measures to ensure repayment of borrowings in case of loan default Borrowings of the EU to grant financial assistance loans to third countries are direct and unconditional obligations of the EU. Borrowings to fund MFA and Euratom loans to third countries are covered by the GFEA which is provisioned by the EU budget so as to cover 9% of the guaranteed loans outstanding at year-end. The procedures to deal with insufficient provisioning to allow honouring EU obligations are similar to those detailed at the end of section 3.2.1 for budgetary guarantees as applied to the provisions set aside in the GFEA compartment for MFA, ELM and Euratom loans. 3.3. European Commission common framework for managing and monitoring provisioned contingent liabilities Because of the increasing importance of budgetary guarantees and financial assistance programmes for the implementation of EU policies, the Commission has enhanced its risk management tools to deal with contingent liabilities with the establishment of a horizontal cross-Commission framework for the implementation and monitoring of these programmes. The objective of this framework is to develop, to the extent possible given the differences between programmes, common methodologies for the design, negotiation and implementation of budgetary guarantees and financial assistance and to allow close monitoring of the evolution of contingent liabilities. The ultimate objective is to fully protect the EU budget from the unforeseen materialisation of losses originating from the budgetary guarantees or provisioned loan programmes. The Steering Committee on contingent liabilities At the heart of this framework is the Steering Committee on contingent liabilities , which focusses on cross-cutting issues, e.g. developing common tools for an effective risk management and reporting on the overall sustainability of contingent liabilities and coordinating a common approach to relevant horizontal provisions in guarantee agreements with implementing partners. Monitoring In order to allow the Commission to constantly monitor potential losses stemming from contingent liabilities, implementing partners and beneficiary countries are obliged to provide the Commission with regular reports with regard to the operational and financial situation of the guarantee programme or to the progress made with respect to the conditionality underlying the EU financial assistance. Financial information provided by the implementing partners shall be externally audited. Reporting Detailed reporting to the European Parliament, the Council and other stakeholders on the build-up and time-profile of contingent liabilities is an essential component of the EU approach to the management of contingent liabilities. The Financial Regulation foresees an integrated system of reporting on contingent liabilities with the objective of providing comprehensive and timely information on the different sources of contingent liabilities, both at individual and at consolidated level. The present report and the reports under Articles 41(4) and 41(5) of the Financial Regulation are the main building blocks of the reporting framework on contingent liabilities. 4. Contingent liabilities arising from financial assistance to Member States 4.1. Overview of total EU risk exposure at the end of 2020 In 2020 the Commission, acting on behalf of the EU, operated four programmes under which it may grant loans to Member States: -The BoP assistance to help EU countries outside the euro area that experience or run the risk of experiencing balance of payments difficulties; -The EFSM that was established in response to the financial crisis to provide financial support to EU Member States experiencing or threatened by severe financial difficulties caused by exceptional occurrences beyond their control; -The SURE programme that was agreed in June 2020 to help finance sudden and severe increases of national public expenditure related to national short-time work schemes and similar measures in response to the COVID-19 crisis; -The Euratom loan facility to help Member States finance investments in nuclear power stations and in industrial installations in the nuclear fuel cycle. Outstanding amounts of loans under the four different programmes at the end of 2020 are presented in table 3.





Outstanding loans Accrued interests Total BoP 200 1.15 201.15 Euratom 78.26 0.16 78.43 EFSM 46 800 596.02 47 396.02 SURE 39 500 3.48 39 503.48 Total 86 578.26 600.81 87 179.08 An adequate measure for the total annual risk to the EU budget emanating from the contingent liabilities arising from financial assistance to Member States is the annually maturing debt, i.e. the total amount of annual payments falling due for repayment by beneficiary Member States in a given year (capital and interest) under the different programmes (Table 4). Table 4: Yearly repayment schedule of outstanding loans (capital + interest) under the existing programmes for the years 2021-2027 at 31 December 2020 (EUR million) Year Euratom BoP EFSM SURE All

programmes 2021 29.05 5.75 10 849.88 23.92 10 908.59 2022 23.24 5.75 3 496.13 25 3 550.11 2023 13.22 5.75 4 221.88 25 4 265.84 2024 13.11 5.75 3 300 25 3 343.86 2025 0 205.75 3 051.25 8 025 11 282 2026 0 0 4 639.25 25 4 664.25 2027 0 0 3 519.25 25 3 544.25 Total 78.61 228.75 33 077.63 8 173.92 41 558.90 4.2. The EU risk management system for contingent liabilities arising from financial assistance to Member States Measures to limit the amount of the contingent liabilities As for financial assistance to third countries, the Financial Regulation limits the total EU exposure in relation to loans granted to Member States. The financial liability and aggregate net payments from the budget are capped at the maximum amount of funds that the Commission is empowered to borrow for funding the financial assistance (as authorised by the relevant basic act) plus the related interest. Measures to ensure repayment of borrowings in case of loan default In contrast to financial assistance to third countries, no provisioning is earmarked in the budget to cater for the unprecedented situation where an EU Member State defaults on its loans to the EU. In such an extreme eventuality where a beneficiary Member State fails to honour its obligations towards the Union, the Commission will, in line with the applicable Own Resources legislation, apply active cash management (i.e. drawing liquidity from the available treasury balance), and if necessary, activate other measures provided for by the financial arrangements applying to the loan. As a last resort, the Commission may call on all the Member States to provide provisionally the difference between the available assets and the cash requirements. If a Member State does not honour such a call on time, provisionally the Commission has the right to make additional calls to the other Member States. The provision of such cash resources will be compensated, without delay, in the framework of the EU budget. The SURE instrument is a specific case since all Member States have agreed to provide irrevocable, unconditional and on-demand guarantees for 25% of the maximum amount of financial assistance . Each Member State contributes to the overall amount of the guarantee proportionate to its relative share in the total gross national income of the EU (based on the 2020 EU Budget). 5. Assessing the sustainability of EU contingent liabilities 5.1. Assessment Framework According to Article 210(3) Financial Regulation “contingent liabilities arising from budgetary guarantees or financial assistance borne by the budget shall be deemed sustainable if their forecast multiannual evolution is compatible with the limits set by the regulation laying down the multiannual financial framework provided for in Article 312(2) TFEU and the ceiling on annual payment appropriations set out in Article 3(1) of Decision 2014/335/EU, Euratom” (i.e. the MFF ceilings and the Own Resources ceiling). In other words, the own resources that the EU is able to draw upon in a single year should suffice to finance the expenditures arising from the MFF as well as any materialising contingent liabilities. Each year, the Commission issues a long-term forecast for those expenditures and the own resources needed for their financing. The difference between the Own Resources ceiling and the own resources necessary to finance the EU budget, referred to as ‘headroom’, represents the EU financial capacity to cover additional outflows relating to the materialisation of contingent liabilities. To consider the contingent liabilities as sustainable, the following equation should be met. Where: Against this background, a distinction should be made between provisioned and un-provisioned contingent liabilities: 1)For partly provisioned contingent liabilities, annual losses have to be covered in the first place by the resources available in the respective compartment of the CPF. Only if losses would be higher than provided for, additional resources would be needed to replenish the respective CPF compartment in subsequent years, which could then have implications in terms of additional EU annual budget expenditure (subject to the MFF ceilings – see paragraph 3.2 above). Therefore, for provisioned instruments the annual assessment of the sustainability of their contingent liabilities shall, first and foremost, consist in verifying whether the provisioning is sufficient to cover the estimated life-time losses net of revenues with a sufficiently high confidence level.

2)For the contingent liabilities arising from borrowing and lending activities to Member States, no provisioning is set aside. If these contingent liabilities were to materialise, they may give rise to additional revenue calls from Member States. The related expenditure remains outside the limits of the MFF ceilings. However, on the revenue side compliance with the overall Own Resources ceiling for the year must be ensured. 5.2. Assessment of the sustainability of the provisioned contingent liabilities As a preliminary remark, EU budgetary guarantees might differ substantially in terms of policy objectives and consequently the risk profile of the underlying operations, which in turn might lead to a different risk appetite applied to each of them. The risk appetite is usually expressed in terms of a lifetime Value at Risk (VaR) at a certain (pre-defined) percentage of confidence level. On the basis of the available data on life-time net estimated losses on 31 December 2020 concerning the budgetary guarantees in place at that date, it is possible to draw the following conclusions: -The applicable provisioning rate of 35% of the total EFSI guarantee is sufficient to cover estimated losses from the operations guaranteed under the different EFSI windows with a confidence level of 95%, in line with the ex-ante risk appetite of the programme; -With regard to the EFSD, the provisioning rate of 50% is consistent with the estimated losses with a target confidence level of 90%, in line with the ex-ante risk appetite of the programme; -The provisions for the ELM held in the GFEA are sufficient to cover estimated losses with a confidence level of 86%. With regard to the existing exposures arising from financial assistance to third countries, the adequacy of the 9% target provisioning rate is confirmed by the following factors: -The absence of payment defaults until the end of 2020; -The 2020 impairment assessment carried out by the Commission which concluded that there is no need to book any accounting impairment for these loans; -For MFA loans, their link to and contingency on an existing IMF programme, which underpins the financial viability of the third country and, thus, the eventual repayment of the Union funds. 5.3. Assessment of the sustainability of the contingent liabilities in respect of the limits of the Own Resources ceiling In order to assess the robustness of the capacity of the EU budget to cater for a situation where the exposure in respect of un-provisioned contingent liabilities also materialises, a stringent sensitivity analysis has been carried out. In a first step a central scenario (baseline) is established, corresponding to the expected evolution of EU spending and financial capacity for the years up until 2027, in line with the long-term forecast report on budget expenditure and revenue need (Figure 2 below). Excluding the current budgetary year, over the period 2022-2027 the headroom available for covering contingent liabilities (existing and new) is around EUR 64 billion per year with respect only to the permanent portion of the Own Resources ceiling of 1.40% gross national income (GNI). The headroom for the remaining portion of the Own Resources ceiling of 0.6% GNI, which is temporary and exclusively available for NGEU liabilities, is not yet specifically analysed in this year’s report as contingent liabilities linked to NGEU started to materialize after the end of 2020. Once the central scenario is established, as a further step, an additional analysis corresponding to sensitivity tests to assess the existing contingent liabilities’ sustainability under extreme scenarios for the years 2022-2027 was performed. These cover the following: 1)Sensitivity test on the economy: In the central scenario, the GNI follows the gross domestic product (GDP) projections for real growth and inflation as per the Commission’s Spring 2021 economic forecast. For the sensitivity test, the projected nominal growth rates are lower than the baseline by -0.5 percentage points for each year of the reported period. With respect to the permanent Own Resources ceiling of 1.40% GNI, this reduces its nominal value and hence the headroom available by on average EUR 2.9 billion per year. 2)Sensitivity test on the revenue side of the budget: This extreme scenario assesses whether the available headroom is sufficiently large to legally allow for additional own resources to be collected should all the Member States benefitting from financial assistance simultaneously fail to honour their repayments falling due. The amounts at stake reflect the repayment schedules at end-2020 (See Table 4 above). The simulation is run excluding the option to redeploy resources within the budget and to temporary postpone other expenditure, which reinforces its remoteness. This would reduce the available headroom on average by EUR 3.8 billion. 3)Shock on the expenditure side of the budget: Under this scenario, the expenditure is projected at its theoretical maximum. It is important to underline that this does not reflect a bottom-up forecast and is unrelated to any actual expectations for the evolution of EU payments. Moreover, unlike a revenue shock, on the expenditure side the decision to initiate additional spending is subject to a proposal by the Commission and the approval of the European Parliament and the Council. Should such a decision be incompatible with the financial capacity of the Union in a given year, it is unrealistic to consider that it would be proposed. The average reduction of the headroom under this simulation would be around EUR 12.6 billion corresponding to the maximum possible ceilings for the MFF payments and individual special instruments.