COMMISSION OF THE EUROPEAN COMMUNITIES 
COM(92) 410 final 
Brussels, 23 September 1992 
Proposal for a 
COUNCIL DECISION 
providing medium-tern financial assistance 
for Estonia, Latvia and Lithuania 
(presented by the Commission) 
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EXPLANATORY MEMORANDUM 
The request for financial support of Estonia. Latvia and Lithuania 
At the G-24 high-level meeting of October 1991, Estonia, Latvia and 
Lithuania expressed their need for financial assistance from the 
Community and the Group of Twenty-Four industrial countries in support 
of their transition process to market-oriented economies. At the 
November Ministerial meeting of the G-24, Ministers agreed to examine 
the possible needs of the Baltic States in the context of the 
arrangements that these countries were expected to conclude with the 
IMF on the basis of their reform programmes. 
Lithuania, Estonia and Latvia became members of the International 
Monetary Fund in Spring 1992. In the following months they finalized, 
in close cooperation with the IMF, their stabilization and reform 
programmes. The Fund in liaison with the Commission consulted the G-24 
before completing its negotiations with the three countries and made 
its recommendation of the programmes and stand-by requests contingent 
on the existence of sufficient complementary financing assurances from 
the Community and the G-24. The financial gaps remaining after 
potential support from the international financial institutions had 
been taken into account, were estimated to be $105 million for Estonia, 
$210 million for Latvia and $285 million for Lithuania, in total some 
$600 mi I I ion. 
The Commission as coordinator of the G-24 financial assistance to the 
Central and Eastern European countries has supported the requests from 
the three Baltic countries and initiated discussions with non-EC G-24 
countries with a view to ensuring the mobilization of the overall 
amount. Most countries revealed a positive attitude towards 
participation in the support scheme and indicated likely contributions. 
On 14 September the Latvian stand-by arrangement was approved by the 
IMF Board. Approval of the Estonian arrangement is 
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expected for 16 September and that of Lithuania for October. Following 
discussions at the informal Ecofin Council on 4-6 September, the 
Commission has decided to present a formal proposal of a Community 
contribution to G-24 assistance to Estonia, Latvia and Lithuania. 
The reform programmes 
Main elements of the stabilization and reform programmes of the three 
Baltic countries are the completion of price reform, conduct of a 
prudent fiscal and monetary policy, adoption of strict incomes-policy 
measures, further liberalization of the exchange and trade system and a 
comprehensive adjustment effort including acceleration of 
privatization, fiscal reform, restructuring or closure of nonviable 
enterprises, banking sector reform and establishment of a legal 
framework consistent with a market economy. 
All three countries have advanced quite far in their reform efforts, 
although the degree of progress in each area differs somewhat from 
country to country. First steps in direction of greater independence 
from the other Soviet republics and towards a market economy had 
already been made in the late eighties under the Soviet system. This 
process was speeded up considerably since the Baltic States have become 
formally independent in Summer 1991. 
All countries are well advanced with price liberalization. By mid-
1992, most prices had been liberalized; some controls remain in the 
areas of energy, transport and rents. The increase of raw materials 
prices, in particular oil imported from Russia, has been passed on to 
consumers to a large extent. As a consequence of these measures, price 
levels have risen by 700 and 1000% between mid-1991 and mid-1992, but 
recently inflation has slowed down. In an effort to conduct a prudent 
fiscal policy, subsidies to state enterprises and consumers were cut or 
eliminated, and decisions were taken to raise taxes and abolish tax 
exemptions. A balanced budget was not always realized; e.g. in Latvia 
the general budget was in deficit with 3te%. But measures were taken to 
bring the budget in balance in the second half of this year. 
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As to monetary reform and policy, there are some differences between 
countries. Estonia introduced its own national currency, the kroon, in 
June in the context of a currency board, with broad current account and 
limited capital account convertibility. This has greatly enhanced the 
governments' ability to stabilize the economy. Latvia introduced a 
parallel currency in May, the Latvian rouble, under the impression of 
the shortage of cash roubles also experienced by other former Soviet 
republics. In July, it left the rouble area completely by replacing the 
remaining Russian roubles by Latvia ones. This has allowed the 
authorities to pursue a more ambitious inflation objective than in 
Russia and has in recent months led to an appreciation of the Latvian 
rouble vis-à-vis those of neighbouring republics. Lithuania is still 
in the rouble zone, but is expected that it will introduce its national 
currency, the litas, in the fall with approval of the IMF stand-by 
arrangement. 
Concerning structural reforms, progress has been slower than expected 
in the area of privatization. Whereas a number of small enterprises 
and flats have been sold, the privatization of larger enterprises has 
not progressed by much. The unresolved question of restitution keeps 
hampering the process. Legislation on bankruptcy, competition and the 
banking sector has generally been passed; however, the implementation 
is still far from complete in most cases. 
The need for additional financial support 
The Baltic States were affected strongly by supply disturbances in 1991 
caused by the disruption of trade with the other former republics of 
the Soviet Union, which hit the Baltic States (compared to other 
Central and Eastern European countries) particularly hard in view of 
their great interdependence with the other republics. In early 1992 
the situation was aggravated by a new external shock as Russia 
substantially liberalized its prices and raised in particular prices 
for oil and other raw materials (terms of trade shock of 20-25% of 
GDP). In Summer the situation was further aggravated by the 
exceptional drought that cut the harvest (food and feed grain) roughly 
in half compared to last year. 
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These shocks to the Baltic economies and the impact of the dismantling 
of the system of central planning have led to a decline of output in 
the order of 30% in the first half of 1992 compared to the same period 
of the previous year; until now this is barely reflected in official 
unemployment figures. The import levels are compressed due to the 
current lack of external financing. Without financial assistance from 
international financial institutions, the Community and other G-24 
countries, the decline of production is likely to continue at about the 
same rate, which would put the full implementation of stabilization and 
reform programmes in Jeopardy. 
Main features of the loans 
The Commission is proposing that the Community would participate in a 
medium-term financial support package from the G-24 to the Baltic 
States (the total amount of which would be approximately $600 mio) with 
up to ecu 220 million to be split up between the countries as outlined 
below. 
Regarding Estonia. the Commission proposes that the Community 
participates with up to 40 mecu in a medium-term balance of payments 
support package from the G-24, the total amount of which would be 
approximately $ 105 mio. 
With respect to Latvia, the Commission proposes that the Community will 
participate with up to 80 mecu in a medium-term balance of payments 
support package from the G-24 totalling approximately $ 210 mio. 
As to L i thuania. the Commission proposes a Community participation of 
up to 100 mecu in a medium-term balance of payments support package 
from the G-24, the total amount of which would be approximately $ 285 
mio. 
The loans the Commission is envisaging would have a maximum duration of 
seven years, would be closely linked to the countries' IMF programmes 
and would be disbursed in two tranches. In each case, the disbursement 
of the first tranche would be conditional upon the approval of the 
country's IMF stand-by arrangement. The second tranche of each loan — 
to be disbursed not before the second quarter of 1993 — would be 
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conditional upon the compliance with a number of performance criteria 
to be agreed with the Estonian, Latvian and Lithuanian government, 
respectively, after consultation with the Monetary Committee. The 
borrowing and lending operations will be perfectly matched and without 
any commercial risk for the Community. 
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Proposai for a 
COUNCIL DECISION 
providing medium-term financial assistance 
for Estonia, Latvia and Lithuania 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic 
Community, and in particular Article 235 thereof, 
Having regard to the proposal of the Commission1) submitted following 
consultation with the Monetary Committee, 
Having regard to the opinion of the European Par Iiament2), 
Whereas Estonia, Latvia and Lithuania are undertaking fundamental 
political and economic reforms and have decided to adopt a market 
economy mode I ; 
Whereas the financial support of the reforms from the Community will 
strengthen mutual confidence and bring Estonia, Latvia and Lithuania 
closer to the Community-, 
Whereas trade, commercial and economic links between the Community and 
Estonia, Latvia and Lithuania are expected to develop within the 
framework of the 1992 Cooperation Agreements; 
Whereas Estonia, Latvia and Lithuania have requested financial 
assistance from the International Monetary Fund (IMF), the Group of 24 
industrial countries and the European Community, and whereas, over and 
above the overall estimated financing which could be provided by the 
IMF and the World Bank to these countries, a global residual financial 
gap of some US$ 600 million remains to be covered, in order to provide 
7) 2) 
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the necessary financing assurances to the stand-by arrangements that 
these countries are expected to conclude with the IMF on the basis of 
their economic adjustment and reform programmes; 
Whereas the financial gap estimates have been provided by the IMF in 
close consultation with the Commission and the Group of 24 industrial 
countr ies; 
Whereas the Commission as coordinator of assistance from the Group of 
24 industrial countries has invited them to provide medium-term 
financial assistance to Estonia, Latvia and Lithuania; 
Whereas the grant by the Community of medium-term loans to Estonia, 
Latvia and Lithuania are appropriate measures to support their balances 
of payments and to strengthen those countries' reserve positions; 
Whereas the question of the risks associated with guarantees from the 
general budget of the European Communities will be examined in the 
context of the renewal in 1992 of the Inter inst i tut ionai Agreement on 
budgetary discipline and improvement of the budgetary procedure; 
Whereas the Community loan should be managed by the Commission; 
Whereas the Treaty does not provide for the adoption of this Decision, 
powers other than those of Article 235, 
HAS DECIDED AS FOLLOWS 
Article 1 
The Community shall grant to Estonia, Latvia and Lithuania medium-
term loan facilities of a maximum amount of respectively ecu 40 
million, ecu 80 million and ecu 100 million in principal, with a 
maximum duration of seven years, with a view to ensuring 
sustainable balance-of-payments situations and strengthening the 
reserve posi t ions. 
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2. To this end the Commission is empowered to borrow, on behalf of the 
European Economic Community, the necessary resources that will be 
placed at the disposal of Estonia, Latvia and Lithuania in the form 
of loans. 
3. These loans will be managed by the Commission in full consultation 
with the Monetary Committee and in a manner consistent with any 
Agreements reached between the IMF and Estonia, Latvia and 
Lithuania. 
Article 2 
1. The Commission is empowered to negotiate with the Estonian, Latvian 
and Lithuanian authorities, after consultation with the Monetary 
Committee, the economic policy conditions attached to the loan. 
These conditions shall be consistent with the agreements referred 
to in the third paragraph of Article 1 and with arrangements made 
by the Group of Twenty-Four. 
2. The Commission shall verify at regular intervals, in collaboration 
with the Monetary Committee and in close coordination with the 
Group of Twenty-Four and the IMF, that the economic policies in 
Estonia, Latvia and Lithuania are in accordance with the objectives 
of these loans and that their conditions are being fulfilled. 
Article 3 
1. The loans shall be made available to Estonia, Latvia and Lithuania 
séparâtly, on a case by case basis. Each loan shall be released in 
two Instalments. 
2. The first instalment shall be released in each case as soon as a 
"stand-by arrangement" has been agreed with the IMF. Subject to 
the provisions of Article 2(2), the second instalment shall be 
released on the basis of a satisfactory track record in the 
implementation of this arrangement and not before the second 
quarter of 1993. 
3. The funds shall be paid to the Central Banks. 
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Article 4 
1. The respective borrowing and lending operations referred to in 
Article 1 shall be carried out using the same value date and must 
not involve the Community in the transformation of maturities, in 
any exchange or interest-rate risk, or in any other commercial 
risk. 
2. The Commission shall take the necessary steps, if Estonia, Latvia 
or Lithuania so decides, to include in the respective loan 
conditions, and also to exercise,an early repayment clause. 
3. At the request of Estonia, Latvia and Lithuania, and if 
circumstances permit an improvement in the interest rate on the 
respective loans, 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. 
4. Ail related costs incurred by the Community in concluding and 
carrying out the operation under this Decision shall be borne by 
Estonia, Latvia and Lithuania as appropriate. 
5. The Monetary Committee shall be kept informed of developments In 
the operations referred to in paragraphs 2 and 3. 
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Article 5 
At least once a year the Commission shall address to the European 
Parliament and to the Council a report, which will include an 
evaluation on the implementation of this Decision. 
Done at Brussels, 
For the Counci1 
The President 
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FINANCIAL RECORD 
1. Budget Iine concerned 
Article (...) loan guarantee for assistance to Estonia, Latvia and 
Lithuania (to be created through an amending and/or supplementary 
Budget). 
2. References (legal base) 
Article 235 of the Treaty 
3. Classification of the Expenditure 
Obi igatory 
4. Description and Justification for the action 
a) Description of the action 
Provision of a guarantee from the Community for individual 
loans to Estonia, Latvia and Lithuania in view of supporting 
their balances of payments and strengthening the countries' 
reserve posit ions. 
b) Justification for the action 
The G24 and the Council of the EEC have endorsed the 
principle of providing assistance In response to a request 
from Estonia, Latvia and Lithuania. 
The budget entry is Intended to provide a budgetary support 
for guarantee offered by the European Community to cover 
the loans extended to Estonia, Latvia and Lithuania. 
5. Nature of the expenditure and method of calculation 
a) Nature of the expenditure 
A guarantee to individual loans in favour of Estonia, Latvia 
and Lithuania. 
b) Method of calculation 
A token entry is proposed given that the amount and timing of 
any call on this budget line cannot be calculated in advance 
and because it is expected that this budget guarantee will not 
be cal led. 
6. Effect of the action on intervention credits 
Only in the case of an effective call on the guarantee. 
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Financing of intervention expenditure 
Endowment of the line by transfer, by reutilisation of 
reimbursed amounts (Article 27(3) of the Financial Regulation 
of 1977), or by amended and/or supplementary budget. 
In order to fulfill its obligations, the Commission can 
provisionally ensure the debt service with funds from Its 
treasury. In that case, Article 12 of the Council Regulation 
(EEC, Euratom) no. 1522/89 of 29.5.1989 wiI I apply. 

BSN 0254-1475 
COM (92) 410 final 
DOCUMENTS 
EN 11 
Catalogue number : CB-CO-92-427-EN-C 
ISBN 92-77-47852-7 
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