COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - EC/EURATOM LENDING AND GUARANTEE CAPACITY FOR EXTERNAL ACTIONS

1. INTRODUCTION

The Guarantee Fund mechanism covers lending in third countries through three very different mechanisms: guarantees of EIB external lending, Euratom external lending and EC macro-financial assistance (MFA) loans. It is designed to both protect the Community budget from the direct impact of default on loans made through any of the instruments, and to act as a constraint on the amount of EC/Euratom lending and guaranteeing.

The Guarantee Fund mechanism has worked well in its function of a shock absorber. The total portfolio of outstanding loans amounts to about EUR 15 billion, over EUR 13 billion of which is in the form of guaranteed EIB lending; and the guarantee fund has paid out a cumulative total of EUR 459 million to cover defaults which would otherwise have had to be covered directly by the budget.

The annual amount of lending and guaranteeing is constrained by the reserve for provisioning the Guarantee Fund, whose ceiling is fixed in the 2000-2006 Financial Perspective. This reserve amount and the rules of the Guarantee Fund restrict the overall lending and guarantee capacity to about EUR 3 billion per year. In principle, whenever a new loan or loan guarantee is decided, a certain fraction of the capital amount of that loan or guarantee has to be provisioned for out of the reserve. The provisioning rate together with the amount of the reserve therefore determines the overall amount of possible lending or guaranteeing. If, for example, all loans and guarantees had to be fully provisioned and the provisioning rate was 10 per cent, a reserve amount of EUR 100 would constrain the lending and guarantee capacity to EUR 1000 per year.

In practice the situation is less simple.

* First for guaranteed EIB external lending, the EC guarantees a portfolio of loans rather than individual loans. Since the EC is providing such a globalized guarantee, it is not thought to be necessary to fix the level of this guarantee at a 100% for the whole amount of the loan portfolio. Under the current rules, only 65% of most of the EIB lending envelopes for third countries are guaranteed by the EC and therefore are provisioned for in the Guarantee Fund. In practice however, this implies that individual EIB loans are fully guaranteed until 65% of the overall portfolio is in default.

* Second, as the lending operations, even when these are for an individual project, or for an individual country in the case of MFA, may take place over a number of years with each part of the loan being subject to considerable uncertainty, the rules on the timing of provisioning are complicated.

In 2001 the reserve for guarantees has been totally exhausted and the situation in the years 2002 to 2004, when enlargement should remove some pressure, looks to be untenable. As there are strong pressures to increase lending through each of the three instruments, it is now necessary to examine how priorities are balanced between them and whether any further flexibility through the guarantee mechanism is appropriate.

2. The Outlook

The table in Annex 1 gives an overview of the outlook. It shows that there is very considerable pressure on the reserve for guarantees in the coming years.

EIB external lending has already been increased substantially in recent years as the envelopes for Central and Eastern Europe, the Western Balkans, the Mediterranean and South Africa have been increased. More recently, amounts for Croatia and for the Turkey Customs Union Special Action have also been included in the general lending mandate and a Special Action in the Baltic Sea Basin of Russia was undertaken. The result is that provisioning needs have increased and would reach up to EUR 3152 million in 2003 and 2004, as compared with EUR 2210 million in 2000. The table also shows that it will be necessary to provision in the years to come for the extension of EIB lending to FRY and the Turkey reconstruction facility. Furthermore, there have already been preliminary indications that some consider it appropriate to make EIB lending available to Ukraine, Moldova and certain Central Asian countries, and there is always pressure from the Russians that EIB lending should be generally available there. Taking all the above into account, an additional guarantee envelope of EUR 300-400 million a year may be necessary.

Provisioning has already been made for about 500 million euro of the proposed Euratom loan of EUR 657 million for K2/R4 and there has also already been provisioning for a Euratom loan of around EUR 210 million in Bulgaria.. However, especially as the issue of the safety of Soviet designed nuclear power stations becomes ever more acute, there will be pressure to further extend Euratom coverage and hence a need for increased provisioning. Potential new Euratom commitments could be in the order of EUR 200-300 million a year. Any further Euratom lending will also require raising the ceiling for Euratom loans which is subject to a separate legislative procedure.

The amounts of MFA loans vary considerably from one year to the other. Recent assistance has been concentrated in the low income countries of the Western Balkans and has increasingly included a grant element. In 2001, it has however been necessary to provision for lending of EUR 225 million to FRY. Taking a longer term view, it seems as if an annual envelope of around EUR 400-500 million could be appropriate to address potential MFA needs, but so far there has been practically no indicative provisioning for the years 2002-2004. A very small amount has been included in the table for Ukraine, for which it has been assumed that the previous provisioning can be reactivated and only the additional EUR 18 million of lending will have to be provisioned for. Also there has already been some tentative discussion about new operations for BiH, FYROM and FRY. Anyone of these would be for a relatively small amount, but cumulatively they would put an intolerable strain on the guarantee mechanism, as would be potential assistance to an economy like Turkey, where the amounts involved would inevitably be considerably larger, or any further extension of the geographical scope of the instrument.

3. THE NEED TO ACT

In view of the difficulty of assessing the likelihood that any of these possible new lending or guarantee actions under each of the three instruments will actually have to be undertaken, it is difficult to put in place effective procedures for deciding on priorities between them. However, given the narrowness of the existing margins even on the basis of what has already been decided, it is essential to act.

In the Commission's view, there should first be a review of the balance between the use of these three instruments and a discussion of the priorities on which their use is based.

If on this basis it were to be decided to increase the lending and guarantee capacity, this would require either an increase in the current ceiling of the reserve for guarantees or an amendment to the rules related to the guarantee mechanism. As raising the reserve ceiling would require a revision of the existing Financial Perspective (2000-2006), it may be useful to explore further the alternative. This option implies an adjustment of the guarantee mechanism, especially over the period 2002 to 2004, so as to allow for a larger loan and guarantee capacity, by some combination of decreasing the provisioning rate of the Guarantee Fund and the percentage of guarantee for EIB envelopes.

The first adjustment could consist in the lowering (in the Guarantee Fund Regulation) of the provisioning rate applying to any new lending or guarantee initiative for third countries, from the current level of 9% to 8%. Such a change will not alter in any way the shock absorber function of the Guarantee Fund. The Fund has now reached its target level and each year substantial amounts (EUR 165 million in 2001) exceeding this target amount are paid back to the Community budget. A provisioning rate of 8% for new lending or guarantee operations would be sufficient to keep the Fund amount at the targeted level, notably because of the interest income earned on the Fund's assets.

A second adjustment could consist in the lowering (in the Decision establishing the EIB's overall external lending mandate) of the "blanket" guarantee provided by the EC to the EIB. Lowering this guarantee from 65% to 60% , or even 50%, would not make a significant difference and would in particular not affect the Bank's access to the financial markets at the most favourable terms. The risk for the EIB to loose an amount in excess of 50% of the guaranteed portfolio remains very low. The EIB had accepted Commission proposals along these lines in 1996 and in 1999.

The table in Annex 2 shows the quantitative effects on the EC lending and guarantee capacity of varying the provisioning rate and/or the percentage guarantee to the EIB.

If the Council and the Parliament share these basic orientations, the Commission will make the necessary legislative proposals.

ANNEX 1

Indicative amounts of loans and loan guarantees to be provisioned under the reserve for guarantees

(in EUR million)

>TABLE POSITION>

ANNEX 2

Capacity of EC lending and guarantee under the Guarantee Fund mechanism (2002 figures)

(in EUR million)

>TABLE POSITION>