Proposal for a COUNCIL REGULATION establishing a facility providing medium-term financial assistance for member states' balances of payments

(presented by the Commission)

EXPLANATORY MEMORANDUM

Introduction

The present facility providing medium-term financial assistance for Member States' balances of payments was established by Council Regulation (EEC) No 1969/88 of 24 June 1988, which merged two Community financial mechanisms, namely the machinery for medium-term financial assistance [1] and the Community loan mechanism designed to support the balance of payments of Member States, [2] into a single facility providing medium-term financial assistance.

[1] Council Decision 71/143/EEC (OJ L 73, 27.3.1971), as last amended by Decision 86/656/EEC (OJ L 382, 31.12.1986).

[2] Council Regulation (EEC) No 682/81 (OJ L 73, 19.3.1981), as amended by Regulation (EEC) No 1131/85 (OJ L 118, 1.5.1985).

On 16 June 1997 the European Council adopted a resolution on the establishment of an exchange-rate mechanism in the third stage of economic and monetary union. This mechanism will make it possible to ascertain whether the Member States wishing to adopt the euro after 1 January 1999 have met some of the convergence criteria spelt out in Article 121 of the Treaty. The European Central Bank and the national central banks of the Member States not belonging to the euro area concluded an agreement on 1 September 1998 laying down the operating procedures for an exchange-rate mechanism in the third stage of economic and monetary union.

The facility may be activated by the Council, either on the initiative of a Member State experiencing, or seriously threatened with, difficulties as regards its balance of current payments or capital movements or on the initiative of the Commission pursuant to the role conferred on it under Article 119 of the Treaty, which remains in force during the third stage of economic and monetary union for the Member States with a derogation. [3]

[3] Within the meaning of Article 122 of the EC Treaty.

After examining the situation in the Member State concerned, the Council may decide whether to grant a loan or appropriate financing facility, its amount, its average duration, the techniques involved in providing it, and the economic policy conditions attached to medium-term financial assistance. Any full or partial financing of medium-term financial assistance by recourse to the Member States is also decided by the Council. The financial assistance facility makes it possible not only to grant substantial financial assistance rapidly but also, because of the conditions attached to it, to boost the confidence of financial markets in the ability of the country concerned to return to a sounder situation.

Since the entry into force of the Council Regulation of 24 June 1988, the single facility has been activated twice for two different Member States. On the first occasion, in 1991, a EUR2.2 billion loan payable in three tranches was granted (only the first tranche of EUR1 billion was released). On the second occasion, in January 1993, the Council decided to grant a EUR8 billion loan to be paid in four tranches (only the first two tranches each of EUR2 billion were released).

Examination of the single financial assistance facility

Under Article 12 of the present Regulation, the Council has on several occasions since 1988 examined, on the basis of a report from the Commission, after the Economic Financial Committee [4] had delivered an opinion and after consulting Parliament, whether the facility still met, in its principle, arrangements and ceiling, the need which led to its creation.

[4] On 1 January 1999 an Economic and Financial Committee was set up to replace the Monetary Committee.

When the Commission report on the financial assistance facility was examined in October 1997, the Council adopted conclusions to the effect that the facility still met the need that had led to its creation and that the matter should be reviewed in the light of the third stage of economic and monetary union. [5]

[5] 2032nd meeting of the Ecofin Council on 13 October 1997.

In its November 1999 report [6] to the Council and Parliament concerning the review of the single facility providing medium-term financial assistance for Member States' balances of payments, the Commission took the view that the facility should be retained, although the option whereby loans granted under the facility could be financed in full or in part by the other Member States should be discontinued and the present ceiling of EUR16 billion reduced to EUR12 billion.

[6] COM(1999)628 final of 26 November 1999.

In its opinion [7] of 14 July 2000 on the Commission's report, the Economic and Financial Committee stated that it agreed with the views expressed by the Commission in its conclusions.

[7] Document EFC/ECFIN/312 final of 31 May 1999.

In its examination [8] of the Commission's report, Parliament was in favour of retaining the facility and amending the legal reference framework for it in order to take account of the start of the third stage of economic and monetary union. It expressed its support for the Commission's recommendation to reduce the present loan ceiling from EUR16 billion to EUR12 billion and called on it to look into the possibility of creating an appropriate facility providing financial assistance for the balances of payments of the applicant countries that could be incorporated in the pre-accession strategy.

[8] Report by the Committee on Economic and Monetary Affairs of 11 October 2000 (A5-0277/2000 FINAL).

The Council examined the financial assistance facility in the light of the Commission's report and the opinions delivered by the Economic and Financial Committee and Parliament. It formulated its conclusions at its meeting on 14 December 2000. It was in favour of retaining the facility and adapting the legal reference framework. It also felt that the present Regulation, which provides for exclusive recourse to the capital market for financing loans granted under the facility, should be amended and the ceiling reduced from EUR16 billion to EUR12 billion. It called on the Commission to present in due course a proposal amending Regulation (EEC) No 1969/88 accordingly.

Comments on the articles

Article 1 incorporates the following amendments:

- since the start of the third stage of economic and monetary union (1 January 1999), only the Member States with a derogation regarding their participation in economic and monetary union may still benefit from the mechanism;

- given the substantial reduction in the number of Member States eligible for the facility, the loan ceiling is reduced from EUR16 billion to EUR12 billion;

- given the development of financial techniques used on capital markets and by financial institutions and in view of the desire to obtain a more advantageous cost of financing for the beneficiary Member State, the Commission's remit should be extended to debt and/or interest-rate swaps.

Article 2 is now specifically concerned with the Member States with a derogation and spells out one of the roles taken on by the Economic and Financial Committee with a view to implementing the facility (this Committee replaced the Monetary Committee at the start of the third stage of economic and monetary union, as stipulated in Article 114(2) of the Treaty).

Articles 3 and 4 clarify how the facility is to be implemented, with due account being taken of the new Treaty numbering introduced since the ratification of the Amsterdam Treaty.

Article 5 spells out the respective roles of the Commission and the Economic and Financial Committee in verifying the economic policy measures that have to be taken by the Member State in receipt of a Community loan.

Article 6 introduces the principle of compatibility between loans granted under the facility and the very short-term financing facility that may be activated by the European Central Bank. The latter facility was established by the Agreement of 1 September 1998 laying down between the European Central Bank and the national central banks of the Member States not belonging to the euro area the operating arrangements for an exchange-rate mechanism during the third stage of economic and monetary union.

Article 7 lays down the facility's borrowing and lending arrangements and supplements those already provided for by Regulation (EEC) No 1969/88 as follows:

- Article 1 of the present proposal provides for the Commission's remit to be extended to debt and/or interest-rate swaps. If, in order to obtain a more advantageous cost of financing, the Commission opts to transform borrowings it makes by means of debt and/or interest-rate swaps, a commercial risk is introduced into the loan financing operation. This commercial risk stems exclusively from the default risk on the part of the counterparty to the swap concluded by the Commission. It is to be noted that the risk is greater when swap operations involve an exchange of capital (foreign-currency swap) than when they include only an interest-rate swap.

In order to minimise this risk for the European Community, the swap counterparties are carefully selected by the Commission on the basis of an analysis of their credit risk (in terms of solvency and liquidity) by specialised rating agencies (e.g. Standard&Poor's and Moody's). On the basis of the analyses by these highly regarded international agencies, the Commission selects only swap counterparties with a top-notch credit rating;

- Under Article 3(2) of the Regulation, the Council decides whether to grant a loan or appropriate financing facility, its amount and its average duration and the size of the successive instalments that will allow the beneficiary Member State to draw down the aggregate amount. The formulation of these arrangements by the Commission leaves some room for manoeuvre as regards the characteristics of the loan instalments, and in particular the currency, maturity and type of interest rate.

When it wishes to draw down an instalment of the aggregate loan granted to it by the Community under the facility, the beneficiary Member State may notify the Commission of its desiderata regarding the aforementioned characteristics and the Commission will see to it that the financing provided corresponds as closely as possible to those desiderata. However, if the desiderata appear inappropriate or impossible to satisfy given the technical constraints imposed by the markets, the Commission reserves the right to inform the beneficiary Member State of this and to propose alternative financing solutions.

Article 8 lays down the method for calculating the amounts to be set off against the ceiling for loans granted under the facility.

Article 9 spells out the decision-making process for loans to be granted under the facility.

Article 10 entrusts administration of the loans to the Commission.

In Regulation (EEC) No 1969/88, the European Monetary Cooperation Fund was entrusted with the administration of these loans. With the start of the second stage of economic and monetary union, it was dissolved under Article 117(2) of the Treaty and its tasks taken over by the European Monetary Institute (EMI), itself established by that article.

Article 123(2) stipulates that, as soon as it is established, the European Central Bank is, if necessary, to take over the tasks of the EMI, which is to go into liquidation at the same time. Under this provision, the European Central Bank is now responsible for administering loans granted under the facility. Being essentially administrative in nature, this task is not one of the essential tasks that have been assigned to the European Central Bank. Accordingly, in the interests of simplification and efficiency (the corresponding loans being managed by the Commission on behalf of the European Community), it is recommended that the administration of loans also be entrusted to the Commission.

Article 11 lays down the frequency with which the Commission will produce a report intended to verify whether the facility established still meets, in its principle, arrangements and ceilings, the need that led to its creation. The differences with Regulation (EEC) No 1969/88 are the following:

- whereas the Regulation fixed the date on which the first Commission report on the facility was to be produced, it was the Council that fixed the dates of the subsequent reports. It seems more expedient to lay down in the Regulation the frequency at which the Commission reports will be produced in future;

- the Regulation currently stipulates that the Commission report on the facility is to be the subject of an opinion from the Economic and Financial Committee and consultation by Parliament before the Council can undertake its examination. Given the essentially technical nature of the Commission report, there should, for reasons of efficiency, be only the consultation of the Economic and Financial Committee before the report is presented to the Council.

Article 12 repeals Regulation (EEC) No 1969/88.

2001/0062 (CNS)

Proposal for a COUNCIL REGULATION establishing a facility providing medium-term financial assistance for member states' balances of payments

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 308 thereof,

Having regard to the Commission proposal, [9] submitted following consultation with the Economic and Financial Committee,

[9] JO C , , p. .

Having regard to the opinion of the European Parliament, [10]

[10] JO C , , p. .

Having regard to the opinion of the European Central Bank,

Whereas:

(1) The second subparagraph of Article 119(1) of the Treaty provides that, acting on a recommendation from the Commission made after consulting the Economic and Financial Committee, the Council will grant mutual assistance where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments. Article 119 does not define the instrument to be used for granting the mutual assistance envisaged.

(2) It should be possible for the operation of lending to a Member State to take place soon enough to encourage that Member State to adopt, in good time in a situation where orderly exchange-rate conditions prevail, economic policy measures likely to prevent the occurrence of an acute balance-of-payments crisis and to support its efforts towards convergence.

(3) Each loan to a Member State must be linked to the adoption by that Member State of economic policy measures designed to re-establish or ensure a sustainable balance-of-payments situation and to adapt it to the gravity of the balance-of-payments situation in that State and to the way in which it develops.

(4) Appropriate procedures and instruments should be provided for in advance to enable the Community and Member States to ensure that, if required, financial medium-term assistance is provided quickly, especially where circumstances call for immediate action.

(5) In order to finance assistance that has been granted, the Community needs to be able to use its creditworthiness to borrow resources that will be placed at the disposal of the Member States concerned in the form of loans. Operations of this kind are necessary to the achievement of the objectives of the Community as defined in the Treaty, especially the harmonious development of economic activities in the Community as a whole.

(6) To this end, a single facility providing medium-term financial assistance for Member States' balances of payments was established by Council Regulation (EEC) No 1969/88. [11]

[11] OJ L 178, 8.7.1988.

(7) Since 1 January 1999 the Member States participating in the single currency no longer qualify for medium-term financial assistance. However, the financial assistance facility must be retained in order to meet not only the potential needs of the present Member States with a derogation as regards participation in the third stage of economic and monetary union but also the needs of new Member States until such time as they adopt the single currency.

(8) The introduction of the single currency has led to a substantial reduction in the number of Member States eligible for the instrument. A downwards revision of the present ceiling of EUR16 billion is therefore justified. The loan ceiling must, though, be kept at a sufficiently high level in order to satisfy properly the simultaneous needs of several Member States. A reduction in the loan ceiling from EUR16 billion to EUR12 billion seems apt to meet this need.

(9) The glaring imbalance between the number of potential beneficiaries of the loans during the third stage of economic and monetary union and the number of countries capable of financing them makes it difficult to maintain direct financing of loans granted by all the other Member States. These loans should therefore be financed exclusively by way of recourse to capital markets and financial institutions, these having now attained a stage of development and maturity which should enable them to undertake such financing.

(10) The arrangements for using the facility must also be clarified in the light of experience gained and account should be taken of the development of international financial markets and of the technical possibilities and constraints inherent in recourse to these sources of financing.

(11) It is for the Council to decide whether to grant a loan or appropriate financing facility, its average duration, its total amount and the amounts of the successive instalments. However, the characteristics of the instalments, in particular the currency, duration and type of interest rate, should be fixed by common agreement between the beneficiary Member State and the Commission. If the Commission takes the view that the loan characteristics desired by that Member State result in financing that is incompatible with the technical constraints imposed by capital markets or financial institutions, it must be able to propose alternative financing arrangements.

(12) In order to finance loans granted under the present Regulation, the Commission must be authorised to contract on behalf of the European Community loans on capital markets or from financial institutions. The development of the financing techniques used on these markets or by these institutions has prompted widespread recourse to derivatives, and in particular debt and/or interest-rate swaps. If loans granted using the facility are to benefit from a more advantageous cost of financing, the Commission must also be able to avail itself of such financial products.

(13) The financial assistance facility established by Regulation (EEC) No 1969/88 must be adapted accordingly. In the interests of clarity, that Regulation should be replaced.

(14) For the adoption of the present Regulation, which provides for the granting of Community loans financed exclusively with funds raised on the capital markets and not by the other Member States, the Treaty offers no powers other than those of Article 308.

HAS ADOPTED THIS REGULATION:

Article 1

1. A Community medium-term financial assistance facility enabling loans to be granted to one or more Member States which are experiencing, or are seriously threatened with, difficulties in their balance of current payments or capital movements shall be established. Only Member States with a derogation as regards participation in the third stage of economic and monetary union, as defined in Article 122 of the Treaty, may benefit from this Community facility.

The outstanding amount of loans to be granted to Member States under this facility shall be limited to EUR12 billion in principal.

2. To this end, in accordance with a decision adopted by the Council pursuant to Article 3 and after consulting the Economic and Financial Committee, the Commission shall be empowered on behalf of the European Community to contract loans on the capital markets or with financial institutions and debt and/or interest-rate swaps designed to transform these loans.

Article 2

Where a Member State with a derogation proposes to call upon sources of financing outside the Community which are subject to economic policy conditions, it shall first consult the Commission and the other Member States in order to examine, among other things, the possibilities available under the Community medium-term financial assistance facility. Such consultations shall be held within the Economic and Financial Committee.

Article 3

1. The medium-term financial assistance facility may be implemented by the Council on the initiative of:

(a) the Commission, acting pursuant to Article 119 of the Treaty in agreement with the Member State seeking Community financing;

(b) a Member State experiencing, or seriously threatened with, difficulties as regards its balance of current payments or capital movements.

2. The Council, after examining the situation in the Member State seeking medium-term financial assistance and the adjustment or back-up programme presented in support of its application, shall decide, as a rule during the same meeting:

(a) whether to grant a loan or appropriate financing facility, its amount and its average duration;

(b) the economic policy conditions attaching to the medium-term financial assistance with a view to re-establishing or ensuring a sustainable balance-of-payments situation;

(c) the techniques for disbursing the loan or financing facility, the release or drawing-down of which shall, as a rule, be by successive instalments, the release of each instalment being subject to verification of the results achieved in implementing the programme in terms of the objectives set.

Article 4

In cases where restrictions on capital movements are introduced or re-introduced pursuant to Article 120 of the Treaty during the period of the financial assistance, its conditions and arrangements shall be re-examined pursuant to Article 119 of the Treaty.

Article 5

The Commission shall take the necessary measures to verify at regular intervals, in collaboration with the Economic and Financial Committee, that the economic policy of the Member State in receipt of a Community loan accords with the adjustment or back-up programme and with any other conditions laid down by the Council pursuant to Article 3. To this end, the Member State shall place all the necessary information at the disposal of the Commission. On the basis of the findings of such verification, the Commission, after the Economic and Financial Committee has delivered an opinion, shall decide on the release of further instalments.

The Council shall decide on any adjustments to be made to the initial economic policy conditions.

Article 6

Loans granted as medium-term financial assistance may be granted as consolidation of support made available by the European Central Bank under the very short-term financing facility.

Article 7

1. The borrowing and lending operations referred to in Article 1 shall be carried out using the same value date and shall not involve the Community in the transformation of maturities, in any exchange or interest-rate risk, or in any other commercial risk.

When the borrowings contracted by the Community are the subject of a debt or interest-rate swap, the commercial risk inherent in a transaction of that kind shall be minimised by recourse to a counterparty with a high-quality credit rating.

When the borrowings are expressed, payable or repayable in the currency of a Member State with a derogation, they may be concluded only after consultation with the competent authorities of that State.

The characteristics of the successive instalments released by the Community under the financial assistance facility shall be negotiated between the Member State and the Commission. Where the Commission takes the view that the characteristics desired by the Member State will lead to Community financing that runs counter to the technical constraints imposed by financial markets or is such as to tarnish the reputation of the Community as a borrower on those same markets, it reserves the right to withhold its agreement and propose an alternative solution.

Where a Member State receives a loan carrying an early repayment clause and decides to exercise this option, the Commission shall take the necessary steps.

2. At the request of the debtor Member State and where circumstances permit an improvement in the interest rate on the loan, the Commission may refinance all or part of its initial borrowings or restructure the corresponding financial conditions.

Refinancing or restructuring operations shall be carried out in accordance with the conditions set out in paragraph 1 and shall not have the effect of extending the average duration of the borrowing concerned or increasing the amount, expressed at the current exchange rate, of capital outstanding at the date of the refinancing or restructuring.

3. The costs incurred by the Community in concluding and carrying out each operation shall be borne by the beneficiary Member State.

4. The Economic and Financial Committee shall be kept informed of developments in the operations referred to in the third subparagraph of paragraph 1 and the first subparagraph of paragraph 2.

Article 8

For the application of the ceiling laid down in the second subparagraph of Article 1(1), the loan operation shall be recorded at the exchange rate of the day on which it is concluded. The repayment operation shall be recorded at the exchange rate of the day on which the corresponding loan was concluded.

Article 9

The Council shall adopt the decisions referred to in Articles 3 and 5, acting by qualified majority on a proposal from the Commission made after consulting the Economic and Financial Committee.

Article 10

The Commission shall make the necessary arrangements for the administration of the loans.

Article 11

Every three years the Council shall examine, on the basis of a report from the Commission and after the Economic and Financial Committee has delivered an opinion, whether the facility established still meets, in its principle, arrangements and ceiling, the need which led to its creation.

Article 12

Regulation (EEC) No 1969/88 is hereby repealed.

Article [13...]

This Regulation shall enter into force on the day following that of its publication in the Official Journal of the European Communities.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels,

By the Council

The President