TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 3

2........... Situation of risks covered by the Budget.......................................................................... 3

2.1........ Overview of capital loan operations covered by the EU guarantee.................................... 3

2.2........ Risk factors.................................................................................................................... 5

2.3........ Cumulative and annual Budget guarantee exposures......................................................... 6

2.4........ Loan operations covered by the Budget guarantee........................................................... 8

2.5........ Evolution of risk............................................................................................................ 11

2.5.1..... Situation of loans to Member States.............................................................................. 11

2.5.2..... Situation of loans to third countries................................................................................ 12

2.6........ Payment under the Budget guarantees........................................................................... 14

2.6.1..... Borrowing/lending operations........................................................................................ 15

2.6.2..... Guarantees given to third parties.................................................................................... 16

2.6.3..... Default interest penalties for late payment...................................................................... 16

3........... Country-risk evaluation................................................................................................. 17

3.1........ Candidate countries...................................................................................................... 17

3.1.1..... FYROM...................................................................................................................... 17

3.1.2..... Montenegro.................................................................................................................. 18

3.1.3..... Turkey......................................................................................................................... 19

3.2........ Potential candidate countries......................................................................................... 20

3.2.1..... Albania......................................................................................................................... 20

3.2.2..... Bosnia and Herzegovina,............................................................................................... 21

3.2.3..... Serbia.......................................................................................................................... 22

3.3........ Mediterranean partners................................................................................................. 23

3.3.1..... Egypt........................................................................................................................... 23

3.3.2..... Lebanon....................................................................................................................... 25

3.3.3..... Morocco...................................................................................................................... 26

3.3.4..... Syria............................................................................................................................ 27

3.3.5..... Tunisia.......................................................................................................................... 29

3.4........ Eastern Partnerships..................................................................................................... 30

3.4.1..... Georgia........................................................................................................................ 30

3.4.2..... Ukraine........................................................................................................................ 31

3.5........ B.R.I.C.S..................................................................................................................... 33

3.5.1..... Brazil............................................................................................................................ 33

3.5.2..... South Africa................................................................................................................. 34

3.6........ Other........................................................................................................................... 35

3.6.1..... Tajikistan...................................................................................................................... 35

This document is a European Commission staff working document for information purposes. It does not represent an official position of the Commission on this issue, nor does it anticipate such a position.

COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

on guarantees covered by the general budget situation at 30 June 2011

1. Introduction

This working document is published in parallel with the report from the Commission to the European Parliament and the Council on guarantees covered by the budget at 30 June 2011. It provides information on quantitative aspects of the risk borne by the Budget, relating to third countries and Member States. An overview of the outstanding amount of loans covered by the budget under each programme is presented in section 2. The third countries representing important risks to the Budget during the second semester 2011, and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external or debt situation, are included in the country risk evaluation in section 3. The evaluation comprises short analyses and tables of risk indicators. The evaluated countries are grouped in 6 sub-sections: candidate countries (3.1), potential candidate countries (3.2) Mediterranean partners (3.3), Eastern partnerships (3.4), BRICS countries (3.5) and other countries (3.6).

2. Situation of risks covered by the Budget 2.1. Overview of capital loan operations covered by the EU guarantee

Table A1 shows the outstanding amount of capital in respect of borrowing and lending operations for which the risk is covered by the Budget. The figures show the maximum possible risk for the EU in respect of these operations and must not be read as meaning that these amounts will actually be drawn from the Fund or the Budget.

· Explanatory notes to table (A1)

(a) Authorised ceiling (Table A1)

This is the aggregate of the maximum amounts of capital authorised (ceilings) for each operation decided by the Council or by the European Parliament and the Council.

(b) Capital outstanding (Table A1)

This is the amount of capital still to be repaid on a given date in respect of operations disbursed.

(c) Remainder to be disbursed (Table A1)

Amount of loans signed not yet disbursed at the reporting date.

· EIB financing operations

In the past, EIB financing operations represented the largest category of the total loan operations covered by the Budget. At the date of this report, it still amounts to 41%. However, the implementation of the EFSM gradually increases the portion of the risk borne by the Budget that relates to the Member States.

The following table provides further details on the breakdown of EIB financing operations.

2.2. Risk factors

Factor increasing the risk:

· the interest on the loans must be added to the authorised ceiling.

Factors reducing the risk:

– limitation of the guarantee given to the EIB[1]:

75% of the total amounts of loans signed in the Mediterranean countries based on the Mediterranean protocols of 1977 and Council Regulations 1762/92/EEC and 1763/92/EEC.

70% of the total amounts of loans signed as part of lending operations with certain non‑Member States authorised by Council Decisions 96/723/EC, 97/256/EC, 98/348/EC and 98/729/EC and a sharing of risk between the EU and the EIB as the Budget guarantee covers only political risks in some cases;

65% of the total amounts of loans signed as part of financing operations with certain non‑Member States authorised by Council Decisions 99/786/EC, 2000/24/EC, Decision 633/2009/EC and by Decision 1080/2011/EU of the European Parliament and of the Council, and a sharing of risk between the EU and the EIB as the Budget guarantee covers only political risks in some cases, as regards the two first-mentioned decisions, and only risks of a political or sovereign nature in the case of the last decision;

– operations already repaid,

– the ceilings are not necessarily taken up in full.

Another factor to be considered is that some loans are disbursed in currencies other than the EUR. Due to exchange rate fluctuations, the ceiling may be exceeded when the amounts disbursed up to the date of the report are converted into EUR.

2.3. Cumulative and annual Budget guarantee exposures

With the cash flow approach based on the existing loans disbursed it is possible to calculate the total capital exposure of the budget and the total capital and interest payments due to be received each year. The following table A2 includes the estimated amount of principal and interest due each financial year by each country according to disbursements made until 30 June 2011[2].

Table A2: Total Annual Risk borne by the Budget in EUR million based on the amounts (capital and interest) due under all operations (MFA, BoP, Euratom, EFSM and EIB) disbursed at 30.06.2011.

2.4. Loan operations covered by the Budget guarantee

The Budget covers two types of lending operations. These are:

(a) Lending operations to Member States. These relate to BoP, EFSM, and to lending granted to certain Member States prior to their EU accession under the MFA, Euratom, (table A3a) and EIB guaranteed lending operations (table A4).

(b) Lending operations to non Member States are covered by the Guarantee Fund for external actions. These include MFA, Euratom (Table A3b) and EIB guaranteed lending operations to third countries (table A4).

2.5. Evolution of risk

The evolution of risk corresponds to the schedule of the total annual repayments (amount in capital including interests due) under all financial instruments guaranteed by the Budget. The situation of loans to Member States implies that the risk is directly covered by the Budget. Regarding the situation of loans to third countries the risk is covered in the first instance by the Guarantee Fund for external actions.

2.5.1. Situation of loans to Member States

With the implemenation of the EFSM the total risk towards Member States including BoP, Euratom, EIB and MFA lending has drastically increased during the first semester 2011.

The EFSM was activated for Ireland with disbursements in January, March and May for a total of EUR 11.4 billion. Portugal has also required lending under this programme and disbursements took place in May and June, amounting to EUR 6.5 billion. Additionnal instalments have been disbursed after 30.06.2011 for a total of respectively EUR 2.5 billion for Ireland and EUR 7.6 billion for Portugal but they are not taken into consideration in graph A1 below, since the relating loan operations were not disbursed at the closing date of the report.

Two additional tranches for BoP loans were disbursed for Romania for a total amount of EUR 1.35 billion.

There were no reimbursements over the period, however the first tranche of EUR 2 billion disbursed to Hungary in December 2008 is due in December 2011 (included in Graph A1).

Regarding Euratom loans, no disbursements took place and EUR 6.6 million was reimbursed by Bulgaria.

Exposure to EU Member States represents now 64% of the total outstanding in comparison with 45% at 31.12.2010 and this trend will most likely continue over the next years.

Graph A1: Total Annual Risk to the Budget[3] relating to Member States at 30.06.2011[4] (EUR million) for the period 2011-2017

2.5.2. Situation of loans to third countries

At 30 June 2011, a total of EUR 2,316 million remained to be disbursed by the EIB under the EUR 20,060 million EIB external lending mandate for 2000 – 2007:

At the same date, an amount of EUR 10,430 million remained to be disbursed out of signatures made under the EIB external mandate for 2007-2013.

Graph A2: Total Annual Risk borne by the Budget related to third countries (EUR million) at 30.06.2011 for the period 2011-2017

Graph A2 presents the result of simulations aiming at estimating the outstanding amount covered by the Fund for the period 2011 to 2016. These simulations are based on disbursement of loans signed and disbursed at the reporting date under the mandates preceding the current EIB external mandate, as well as under the current mandate, established for the period 1 February 2007—31 October 2011 by Decision No 633/2009/EC of the European Parliament and of the Council which has been extended to 31.12.2013 by Decision 1080/2011/EU of the European Parliament and of the Council of 25 October 2011 (OJ L 280, 27.10.2011, p. 1).

Graph A3: Estimated outstanding amount covered by the Fund from 2011 to 2017 (EUR million).

Graph A3 presents the result of simulations aiming at estimating the outstanding amount covered by the Fund for the period 2011 to 2016. These simulations are based on disbursement scenarios[5] under the mandates preceding the current EIB external mandate, as well as under the current mandate, established for the period 1 February 2007—31 October 2011 by Decision No 633/2009/EC of the European Parliament and of the Council which has been extended to 31.12.2013 by Decision 1080/2011/EU of the European Parliament and of the Council of 25 October 2011 (OJ L 280, 27.10.2011, p. 1).

The rhythm of disbursements has a strong impact on the amount of the provisioning of the Fund in future years. The simulation is therefore subject to a non-negligible degree of uncertainty.

2.6. Payment under the Budget guarantees

The EU borrows on the financial market and on‑lends the proceeds to Member States (balance of payment, EFSM), and to third countries (macro-financial assistance) or utility companies (Euratom).

Procedures have been set up to guarantee the repayments of the borrowings due by the EU and also the guarantees given in connection with the EIB financing operations.

2.6.1. Borrowing/lending operations

The loan repayments are scheduled to match the repayments of the borrowings due by the EU. If the recipient of the loan is in default, the Commission will first draw on its own cash resources to ensure a timely repayment of the EU borrowing on the contractual due date.

Should the amounts needed for the necessary cash coverage exceed, in a certain period or date, the available Commission's treasury balances, the Commission would, in accordance with Article 12 of Council Regulation 1150/2000[6], draw on additional cash resources from the Member States in order to fulfil its legal obligations towards its lenders.

In the case of BoP loans, where amounts to be reimbursed can be very high, the beneficiary Member States are required to transfer the amounts due to the European Central Bank seven business days in advance of the contractual due date. This gives enough time for the Commission and Member States to provide for the cash advance to ensure timely repayment in case of default. The same process is beeing applied for the EFSM loans with 14 days lead time.

In a second step, the treasury situation would be regularised as follows:

Euratom and MFA loans

a) if the payment delay reaches three months after the due date, the Commission draws on the Fund to cover for the default and obtain the necessary funds to replenish its treasury.

b) the Commission might also need to draw on the Budget, most likely by means of a transfer, to provide the corresponding Budget line under article "01 04 01 European Union guarantees for Union and Euratom borrowing operations and for EIB lending operations" with the necessary appropriations needed to cover the default. This method is used when there are insufficient appropriations in the Fund or if the borrower is a Member State[7] and the transfers are likely to require advance authorisation by the budgetary authority.

c) by the re-use of recovered funds, if any.

Balance of Payments (BoP) and EFSM loans

a) by the re-use of funds from late payments

b) the Commission may also need to propose a transfer or an Amending Budget to budget the cash advance under the corresponding budget line "01 04 01 01 European Union guarantee for Union borrowings for balance-of-payments support" or "01 04 01 03 European Union guarantee for Union borrowings for financial assistance under the European financial stabilisation mechanism".

2.6.2. Guarantees given to third parties

The EU provides a guarantee in respect of financing granted by the EIB under the external mandates. When the recipient of a guaranteed loan fails to make a payment on the due date, the EIB asks the Commission to pay the amounts owed by the defaulting entity in accordance with the relevant guarantee agreement.

The guarantee call must be paid within three months of receiving the EIB's request, either from the Fund[8] or directly from the Budget should the resources of the Fund be insufficient[9].

The EIB administers the loan with all the care required by good banking practice and is obliged to seek the recovery of the payments due after the guarantee has been activated.

2.6.3. Default interest penalties for late payment

(a) EU or Euratom loans

For loans granted by the EU or Euratom, default interest is owed by loan beneficiaries for the time between the date at which cash resources are made available by the Budget and the date of repayment to the EU.

(b) EIB loans

For EIB loans, EIB is entitled to default interest which is calculated during the period between the due date of a defaulted loan instalment and the date of receipt of the cash resources by the EIB from the Commission. From the latter date, default interest is due to the Commission.

3. Country-risk evaluation

Third countries representing important risks to the Budget during the second semester 2011, and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external or debt situation, are included in the country risk evaluation.

The evaluation presented below comprises short maroeconomic analyses and tables of risk indicators. The evaluated countries are grouped in 6 sub-sections: candidate countries (3.1), potential candidate countries (3.2), Mediterranean partners (3.3), Eastern Partnerships (3.4), BRICS countries (3.5) and other countries (3.6).

Explanatory notes for country-risk indicators

Abbreviations and English words used in tables

S&P || Standard and Poor's

FDI || Foreign Direct Investment

GDP || Gross Domestic Product

CPI || Consumer Price Index

est. || Estimates

m EUR || EUR million

bn USD || USD billion

NA || not available

Standard footnotes used in the table

1) Includes only EU and EIB loans (outstanding disbursements) to CEEC[10], NIS[11] and MED[12].

2) The higher the ranking number, the lower the creditworthiness of the country. Countries are rated on a scale of zero to 185 or to 100 (the number of countries has been reduced from 185 to 100 from January 2011). 185, respectively 100, represents the highest risk of default. A given country may improve its rating and still fall in the ranking if the average global rating for all rated countries improves.

3.1. Candidate countries 3.1.1. FYROM

Growth accelerated in the Former Yugoslav Republic of Macedonia during the first half of 2011, reaching 5.2%. This situation was mainly driven by gross fixed capital formation in the first quarter and private consumption in the second quarter. Increased public construction and subsidy payments have also contributed to the growth acceleration. In line with strong domestic demand, stronger imports led to a widening in the trade deficit to 12% of estimated full-year GDP (from 10.5% in the first half of 2010). Net current transfers amount to 8% of GDP and the current account deficit widened to 3.5% of GDP (from 2.8% in 2010). Capital inflows continued to surpass the current account deficit. However, a significant part of this inflow was due to drawing funds from a Pre-cautionary Credit Line agreed with the IMF in late 2010. This credit line amounts to some 6% of GDP, with about half of the credit line drawn in March. As a result of the inflow of funds from the pre-cautionary credit line, the stock of foreign exchange reserves increased by EUR 2 billion representing between 3 and 4 months of imports. Gross external debt rose to 61% in mid-2011, up from 59.5 % of GDP in mid-2010.

3.1.2. Montenegro

The economy of Montenegro, after contracting by 5.7% in 2009, started to recover in 2010 and grew by 2.5% in 2010 and is expected to expand by 2.7% in 2011. On the supply side, manufacturing accelerated by 9.7%, while the construction sector expanded by 30.8% in the first half of 2011. On the demand side, retail sales increased by 14.3%. Consumer prices remained subdued during 2010, thanks to a reduction in food prices and the reduction of annually adjusted electricity prices before accelerating to 3.5% in the first half of 2011. Unilateral use of EURO implies that there is only limited scope for domestic monetary policy instruments. In 2010 the consolidated budget deficit widened to 5% of GDP (including tax arrears worth 2% of GDP) and stood at 1.6% of GDP in the first half of 2011. Public debt increased from 41% of GDP in 2010 to 45% of GDP in June 2011. The current account deficit contracted to 25% of GDP in 2010 (compared to 30% a year earlier) and decreased further during the first half of 2011 to 22.4% of GDP. The improvement was mainly driven by a widening surplus on the services and income accounts. The current account deficits are being largely covered by net FDI and net portfolio investments.

3.1.3. Turkey

The economy of Turkey has recovered strongly after the dramatic contraction of 4.8 % in 2009; with a growth reaching 9% in 2010 and 10.2% in the first half of 2011. A double-digit growth of imports, combined with a domestic credit boom, fuelled private consumption and investment. Headline inflation eased after reaching 10% in early 2010 and was hovering at around 6.5% in the first half of 2011.

On the back of the strong GDP growth, the fiscal deficit narrowed to 3.6 % of GDP in 2010, and the public debt stock decreased by almost 4 % of GDP in the previous year but still amounts to 40% of GDP at the end of 2010. In the first half of 2011, Turkey reports strong fiscal results, with the overall budget balance improving on an annual basis due to a surge in tax revenues and falling interest expenditures. The current account deficit rose rapidly to 6.6% of GDP as imports increased by more than 15% in volume and the terms of trade worsened on higher oil and commodity prices. In the first half of 2011, the current-account deficit more than doubled compared with the previous year, reaching EUR 35 billion (about 8% of GDP). Turkey's gross external debt amounts to 40% of GDP with private external debt representing two thirds of the total. International reserves fell by about 3% to EUR 80 billion covering about 4 months of imports. In large part as a result of the country's monetary policy, the domestic currency depreciated against the US dollar and the EUR, in particular in the first half of 2011.

3.2. Potential candidate countries 3.2.1. Albania

Albania's real GDP grew by an estimated 3.4% in the first quarter of 2011 (from 4.1% in 2010). Inflation pressures accelerated in early 2011 reaching a peak of 3.5% (year on year) in February before receding thereafter to 3.1% in August. The main drivers of inflation were higher prices on electricity and water, food prices and the depreciation of the lek. The banking sector, the main source of financial intermediation in Albania, remains well capitalised and liquid even if non-performing loans increased sharply, from 9.1% in 2009, to 12.6% in 2010 and further to 16.6% in the second quarter of 2011. The fiscal deficit amounted to 3.1% of GDP in 2010, less than half of 2009 which came in at 7.1% of GDP. Lower than planned revenue in the first half of 2011 obliged the government to re-balance the 2011 budget. Revenue shortfalls were reflecting over-optimistic projections and underperforming indirect tax receipts amid sluggish domestic demand. The revised budget envisages a reduction in revenue and expenditure, while keeping the 2011 deficit target unchanged at 3.5% of GDP. Public debt levels remained relatively high, although the debt-to-GDP ratio declined to 58.5% in 2010, from 59.3% in the previous year. Contingent liabilities from state guarantees account for some 3.8% of GDP. The current account deficit contracted to 11.9% of GDP in 2010 but is estimated to have increased to 13% of GDP in the second quarter of 2011 due to both slower exports and higher imports.

3.2.2. Bosnia and Herzegovina,

The country recovered in 2010, after the recession of 2009, with a real growth rate of 0.7%. According to available indicators, domestic demand is increasing in 2011. Industrial production rose by 7.7% (year-on-year) in the first half of 2011, while the retail sales soared by 14.4%. However, the unemployment rate remains high at 43.1%. The inflation is on upward trend, reaching 4% in June 2011.However, the acceleration of the consumer prices growth is not demand-driven but rather a result of global movements (food, oil prices).

Financial and monetary stability has been preserved, also due to the high credibility of the currency board arrangement. Following the significant improvement of the current account balance in 2009 and in the first half of 2010, the deficit started to rise again, mainly due to rising imports. Net inflow of FDI remains low, covering slightly less than one fifth of the current account deficit in the first half of 2011. External public debt soared by 20.2% in 2010, while witnessing some slight decline in the course of 2011 to around 24% of GDP. Official foreign exchange reserves were 5.7% lower in June 2011 compared to end 2010, covering about 5 months of imports. The inability of the political parties to agree on State-level government formation after the last general elections, held in October 2010, did not allow for programme discussions and reviews under the Stand-By Arrangement with the International Monetary Fund to take place in the course of 2011.

3.2.3. Serbia

During the first half of 2011, the gradual economic recovery of Serbia was on track as GDP growth accelerated to 3%. However, in the light of the recent evolution of international environment, a slowdown of activity is expected and real GDP growth should be limited to 2%-2.5% for 2011. The economy continues to be driven by solid export activity but domestic demand remains weak as private consumption is constrained by eroded disposable income while investment is picking up slowly. The export activity, which in 2010, was supported by the depreciation of the dinar, has helped to keep the current account deficit at around 7% of GDP. Financial and capital flows have started to strengthen in 2011, with FDI and portfolio investment substantially higher than the previous year. Foreign exchange reserves with the National Bank of Serbia (NBS) have stabilised at about EUR 10 billion, covering around 8 months’ of imports. By end of July 2011, total external debt reached just over EUR 23 billion representing 75% of GDP. While the external position remained broadly solid, the economy came under pressure as inflation spiked as a result of rising agricultural and food prices. Inflation peaked in April 2011 at 15% (year-on-year), but thereafter began to recede mainly thanks to falling food prices. The fiscal deficit reached 4.7% of GDP at the end of 2010 and, by consequence, public debt grew by more than EUR 1.6 billion by end of August representing almost EUR 13.8 billion and 41.7% of GDP.

3.3. Mediterranean partners 3.3.1. Egypt

The Egyptian economy grew by 0.4% in the second quarter of 2011 following a drop of 4.2% in the previous quarter due to the impact of the spring uprising on the domestic and external side of the economy. Real GDP is expected to have grown by about 1.2% in 2010-2011 (July – June). The fiscal deficit is estimated to have deteriorated to about 10% of GDP during the same period partly due to a strong fall in tax and customs revenues in the first half of 2011, as well as the impact of higher spending on food and fuel subsidies.

The current account balance deteriorated rapidly in the first quarter of 2011. The Egyptian government estimates that tourism revenue has fallen by about 25% in 2010-2011, compared to the previous fiscal year. Remittances were also hit as expatriate workers started to be displaced from Libya. The current account deteriorated to around -3.5% of GDP in 2010-2011 from -1.5% of GDP in the previous year. There were strong capital outflows in the first quarter of 2011 linked to the government bond market; around USD 6 billion was withdrawn by foreign investors. The authorities have drawn down foreign currency reserves, including those held at commercial banks, to finance the widening current account deficit and support the managed float of the Egyptian pound against the US dollar. Since the start of 2011, official currency reserves have fallen sharply from around USD 50 billion to around USD 33 billion in August 2011, now equal to about five months of imports, while the monthly pace of decline is slowing. Consumer price inflation was 10.4% in July 2011, year-on-year, the same rate as in July 2010.

3.3.2. Lebanon

Real GDP growth in Lebanon is projected to slow to around 1% in 2011 following the recent domestic political stalemate and the conflict in Syria. Tourism revenues and exports fell by 15% and 8.5% respectively during the first quarter of 2011. Financial flows and international reserves have also experienced a downward trend during the first half of the year. Inflation is estimated at 5% in light of sustained global price increases. Despite the formation of government in July 2011, five months after the collapse of the previous one, the economic situation remains vulnerable, especially on the fiscal side. According to IMF projections, the fiscal deficit would exceed 10% of GDP in 2011-2012, while the primary surplus would drop from 3% of GDP in 2010 to 1% in 2011 in view of reduced revenues. Increasing financing needs have been putting pressures on the public debt, which remains exceptionally high, although sustainable (currently estimated at 135% of GDP), with almost half of it denominated in foreign currency. On the external side, sustained energy prices and the regional turmoil have contributed to widening the current account deficit to an estimated 14% of GDP for 2011. This effect combined with the slowdown in FDIs has impacted the balance of payments since the collapse of the government leading to a reduction in international reserves during the first months of 2011 (from the exceptionally high level of USD 30,2 billion at the end of 2010). Nevertheless reserves have recovered since August 2001 and are projected to reach an amount of USD 30.5 billion by the end of 2011.

The EU has supported the country in the past by providing MFA (a combination of medium-term loans of EUR 50 million and grants of EUR 30 million), planned to be disbursed in two tranches. The first tranches of grants and loans were disbursed successfully in December 2008 and June 2009 respectively, but the disbursement of the second tranche was cancelled reflecting the IMF arrangement expiration in June 2009 and lack of compliance with structural reform conditions. No follow-up MFA operation or IMF arrangement to Lebanon is currently being considered.

3.3.3. Morocco

The economy grew by 4.2% in the second quarter of 2011 (from 4.9% in the previous quarter) driven by strong activity in both agricultural and non-agricultural sector. The only sector of the economy which contracted in the first quarter of 2011 was hotels and restaurants due to the terrorist bombing in Marrakech. Tourism represents around 10% of GDP. The fiscal deficit expanded in 2010 to 4.5% of GDP from 2.1% of GDP in 2009 owing to increases in capital expenditure, expenditures related to subsidies on fuel prices and the negative impact of tax cuts on revenue. Public debt increased to just above 50% of GDP in 2010, of which around 22% is external public debt. For 2011, the Ministry of Economy and Finance expects real GDP growth of 5%. This may be slightly optimistic given that subsidy spending will be much higher in 2011 and growth in the first half of the year has been slightly lower than foreseen. Unemployment remained stable at 9.1% in 2010 with a marginal reduction in urban unemployment from 13.8% in 2009 to 13.7%. Foreign reserves increased slightly in 2010 remaining at a comfortable level of about seven months of imports of goods and services and more than the level of external debt. The index of the Casablanca Stock Exchange (CSE) increased by 30% during 2010 but has slipped back by about 15% since the start of 2011 partly due to the regional unrest. Inflationary pressures have increased in 2011 due to higher food and fuel prices. Consumer price inflation is expected to be about 1.6% at the end of 2011, year-on-year, compared to 1.4% for 2010.

3.3.4. Syria

Continuous violent unrest, since March 2011, has seriously affected the Syrian economy and the confidence of business sector in the regime. Consumption has decreased by around 50% on almost all non-essential products. As a consequence the retail sector is suffering significantly with the closure of major retail outlets, furthermore many firms are no longer able to pay their employees and have had to dismiss them or to reduce working hours drastically. In the external sector Syrian exporters have also experienced unrest and political uncertainty in partner countries (Egypt, Lebanon, Tunisia, and Yemen) and have seen their activity suffer a drop or even stop. Imports have also decreased significantly. The tourism sector is devastated, with most of hotels completely unoccupied. In absence of reliable statistical data it is obvious that the GDP has dramatically decreased in the first semester of 2011 (following an increase of 3.2% in 2010). Food and energy subsidies have been reintroduced by the new government; contributing to maintaining inflation at 6% (compared with 4.4% in 2010). No fiscal revenues, from the private sector, are foreseen for the 2011 budget. As the budget for current expenses was exhausted in July, the increasing expenditure for public salaries (rise by up to 62%), subsidies and military spending must be financed from funds earmarked for investment. The budget deficit is expected to reach at least 8% of GDP (twice the level of 2010).

The level of remittances is down, most probably, because expatriate workers prefer to keep their money out of Syria. More generally, the lack of confidence in the country's financial sector is obvious with the withdrawal of some leading actors from the banking sector and the postponing of decisions by foreign investors.

By using part of Syria's foreign currency reserves, the government has succeeded to limit the depreciation of the value of SYP against the USD to an estimated 15%, which is still an artificially high level. Foreign exchange reserves still remain (officially) at 18 billion USD and cover 12 months of imports. The situation of the country will worsen with the adoption of sanctions, from the EU, regarding the ban on exports of Syrian oil. The risk of total collapse of the Syrian economy in the current context of civil war cannot be excluded if there is no political change to direct the country out of the crisis.

In the wake of a deteriorating situation in Syria resulting from serious violations of human rights and fundamental freedoms, the Foreign Affairs Council of 23 May 2011 decided to suspend all preparations in relation to new bilateral cooperation programmes and to suspend the ongoing bilateral programmes with the Syrian authorities under the European Neighbourhood and Partnership Instrument (ENPI) and MEDA instruments. Moreover, the Council invited the European Investment Bank (EIB) to not approve new financing operations in Syria . The European Parliament in its Resolution of 7 July 2011 welcomed the Council conclusions to impose restrictive measures on Syria as well as the suspension of new EIB operations in the country.

In addition, the Council decided on 14 November 2011 to prohibit disbursements by the EIB in connection with existing loan agreements between Syria and the EIB as well as suspend EIB technical assistance contracts for sovereign projects in Syria . This Decision has been thereafter consolidated in Council Decision 2011/782/CFSP of 1st December 2011 and Council Regulation (EU) N° XXX/2011 of X December 2011.

3.3.5. Tunisia

Economic activity has been significantly affected by the political unrest and the conflict in Libya. Real GDP growth of Tunisia shall be nearly zero in 2011 (compared to almost 3% in 2010), reflecting the impact of the regional crisis on tourism, remittances, trade, foreign investments and production interruptions due to strikes. Inflation remains moderate with a rate of 3.5% for 2011 (from 4.4% in 2010) due to the weak domestic demand and the implementation of food and energy subsidies. On the fiscal side, implementation of a planned fiscal stimulus combined with the negative impact of weakened economic activity on revenues have been putting pressure on public finances, and will contribute to a widened budget deficit of nearly 4.5% of GDP in 2011 (compared to 1.3% of GDP in 2010). The public debt is expected to rise to a level of almost 42% of GDP by the end of the year, mainly due to additional external borrowing. External debt will nevertheless not exceed 50% of GDP. The fall in external receipts and the rise in international food and fuel prices have already impacted the current account which is expected to record a deficit of 5.7% of GDP in 2011 (from almost 4.8% of GDP in 2010). Although international reserves decreased by USD 2 billion between January and July, they increased to USD 8.6 billion in August following the disbursement of external support. Pressures on the exchange rate have been relatively smooth with the depreciation of 2% of the Tunisian dinar against the EUR since the beginning of the year, leading to a 10% increase in exports. According to the IMF, the nominal effective exchange rate has been broadly stable. The Tunis stock exchange has recently shown some recovery but remains volatile. The TUNINDEX capitalisation index has currently stabilized at about 8% below its level of the end of 2010.

No request has been submitted for an IMF arrangement but this is likely to come after the October elections which would, in principle, make Tunisia a potential candidate for EU MFA.

3.4. Eastern Partnerships 3.4.1. Georgia

After two years of low or negative growth, the year 2010 saw a strong revival of economic activity with real GDP increasing by 6.3%, driven by exports and public investments. For 2001, GDP growth is projected to reach 5.5%. In this context the fiscal deficit has been reduced from 9.2% of GDP in 2009 to 6.6% in 2010 and is expected to decrease to 3.7% in 2011. Inflation was 7.1% in 2010 but it reached 14.3% (year-on-year) in May 2011 due to increased international prices for food and gas. The current account deficit remains large, at 9.6% of GDP in 2010, and it is expected to widen to 10.8% of GDP in 2011. Despite a significant recovery of export volumes, trade deficit reached 22.2% of GDP in 2010 remaining unchanged in comparison to 2009. As far as the financing of the current account is concerned, FDI inflows were negatively affected by the crisis and declined in 2010 in comparison to the previous year; they are expected to remain subdued in 2011 at around USD 700 million. At the end of 2010, official reserves were at USD 2.3 billion; by April 2011, monetary authorities accumulated further official reserves that reached USD 2.8 billion; they remained at that level since then. A vulnerability in the balance of payments relates to a relatively high level of external debt (at 61.9% in 2010) and, in particular, a strong recent increase in external public debt which increased from only 20.9% of GDP in 2008 to 34.4% in 2009, broadly the same level as in 2010 (34.1% of GDP).

3.4.2. Ukraine

Ukraine has been hardly hit by the global economic crisis. From late 2008 it suffered a parallel balance-of-payments and banking crisis explaining that GDP contracted by nearly 15% in 2009. The situation improved in 2010 with the GDP growing by 4.2% with a forecast of 4.7 % for 2011. In 2010, at just over 5% of GDP, the general government deficit was lower than the programme target of 5.5%, and in the first half of 2011, revenue performance was strong while budget spending remained prudent. However, the 2011 target deficit of 3.5% will be difficult to accomplish in the context of the overall economic slowdown. By the end of the first half of 2011, general government debt stood at USD 60 billion (36% of GDP), which represents a notable improvement compared to the situation of 2008 and 2009. In 2011, inflation stood at 7.7% in the first quarter and at 9.2% by the end of the second quarter, before slowing down to 9% until the end of September. Nevertheless, due to expected higher energy and food prices in the second half of the year, inflation might move into double-digit area.

Trade deficit reached USD 8.7 billion in 2010 (6.3% of GDP) and is expected to widen in 2011 to USD 11.4 billion (7.3% of GDP). Foreign exchange reserves amounted to USD 34.8 billion by the end of April 2011 before decreasing by USD 3 billion in September 2011. In the first half of the year of 2011, the current account deficit widened, reaching USD 2.5 billion (corresponding to 3.7% of GDP) and is forecasted to reach 4% of GDP for the whole year (compared to 3.1% in 2010). Foreign direct investments, however, are not expected to recover significantly in comparison to 2010.

3.5. B.R.I.C.S. 3.5.1. Brazil

Brazil recovered strongly from the crisis and grew at a record 7.5% in 2010 driven mainly by strong domestic demand and good prospects for the Brazilian economy (high commodity prices, low unemployment, and high confidence). The IMF expects GDP growth to moderate to 3.8% in 2011 while inflation should be limited to 7.5% in 2011. Concerns on the existence of credit bubbles have been voiced as credit growth has remained very high, and housing prices have been increasing. Nevertheless, banks remain well capitalised and the mortgage markets are still in their early stages of development. The current account deficit has been deteriorating, driven by lower trade surplus and by higher services and income deficits. Recent data show some moderation in the current account deficit. On the fiscal side, the government announced spending cuts worth USD 30 billion (around 1.3% of GDP) for 2011. The debt-to-GDP ratio declined from to 40.4 % in 2010 and the Brazilian Ministry of Finance expects it to drop to 37.8% in 2011.

Recent concerns about a potential global recession and falling commodity prices led to a significant depreciation of the real. From 1 August to 26 September 2011, the real depreciated by 10.3% against the EUR and by 16.3% vis-à-vis the USD. This prompted the central bank to intervene on 18 September. The strong depreciation of the currency, while helping exports in the short run, is worrying policy makers of the country as it could aggravate the problems already existing with inflation while increasing the external-debt repayment burden.

3.5.2. South Africa

South African economy recovered in 2010 with a growth rate of 2.8%. In the current year GDP is likely to continue increasing; growth rate is likely to exceed 3.3%, driven mainly by household consumption which is however a bit less than previously expected. The downward revision is due to the increasingly uncertain external environment, social unrest and rising unemployment. Although economic growth is not strong enough to make an impact on the high unemployment rate (estimated to be above 24% in 2011, with the manufacturing, trading and mining sectors shedding the largest numbers of jobs), higher salaries and subdued inflation will support consumers' domestic demand. Annual inflation reached 5.1% (year-to-year) in June 2011 due to the rise in food prices, fuel and electricity prices, and wage growth. Monetary policy will remain focused on keeping annual inflation within the official target range of 3 to 6%. The SARB (South African Reserve Bank's) monetary policy committee cut rates aggressively in 2009-2010 and in November 2010 proceeded to a further reduction of 50 basis points in the repo rate (to 5.5%, the lowest level for 40 years). According to the new budget plans, the government deficit will remain at 4.2% of GDP in 2011-2012 and should decline slowly in the coming years, larger than foreseen previously. The public debt burden will however remain relatively low at below 50% of GDP.

3.6. Other 3.6.1. Tajikistan

Tajikistan's GDP rose by 6.5% in 2010 (year-on-year) and is expected to expand by 5.8% in 2011. The moderate slowdown in growth, despite rising remittances, reflects the impact of global economic trends on demand for Tajikistan's exports. Inflation should remain stable in the coming months and reflect global price trends (food prices have gone up sharply in the recent past).

The tax base remains narrow, with a large share of revenue still linked to the performance of the aluminium and cotton sectors, which presents an ongoing risk to the government’s fiscal targets. Despite the high level of social spending the budget deficit is expected to remain at around 1% of GDP in 2011. International aid continues to meet some of the government’s spending requirements.

Tajikistan remains dependent on sales of aluminium, cotton and electricity for most of its export revenue. Aluminium exports rose in 2010, following a sharp fall in 2009 that partly reflected a cut in output because of power supply problems and lower external demand. Export revenue continued to rise in 2011. The current-account balance is expected to register a deficit of around 3.7% of GDP in 2011, compared with the surplus of 2.2% of GDP in 2010. While Tajikistan's external as share of GDP is slowly decreasing, the country's external position remains fragile, in particular in view of a low level of international reserves (about 1.5 months of imports).

[1] Within each portfolio individual EIB loans are, de facto, guaranteed at 100% until the global ceiling is reached.

[2] For the purpose of this calculation, it is assumed that defaulting loans are not accelerated, i.e. only due payments are taken into account.

[3] Based on the amounts due (capital and interest) under operations disbursed at 30.06.2011.

[4] As of 30 June 2011, the 2011 annual risk for Member States was EUR 2,618 million.

[5] The rhythms of disbursement of loans not yet signed and, or not yet disbursed are assumed.

[6] Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 (OJ L 130, 31.5.2000, p.1-12) implementing Council Decision 2007/436/EC, Euratom of 7 June 2007 on the system of European Communities' own resources (OJ L 163, 23.6.2007, p. 17-21).

[7] The loans (and loans guarantees) to accession countries were covered by the Guarantee Fund until the date of accession. From that date, those that remained outstanding ceased to be external actions of the Union and are therefore covered directly by the Budget.

[8] Since the entry into force of the Regulation establishing the Guarantee Fund for external actions, the Agreement between the EU and the EIB on the management of the Fund foresees that the Commission must authorise the Bank to withdraw the corresponding amounts from the Fund within three months from the date the EIB calls in the guarantee. Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 establishing a Guarantee Fund for external actions (codified version), the "Guarantee Fund Regulation" (OJ L 145, 10.6.2009, p.10).

[9] If there are insufficient resources in the Fund, the procedure for activating the guarantee is the same as for borrowing/lending operations, see 2.6.1 above.

[10] Central and Eastern European Countries.

[11] New Independent States.

[12] Mediterranean countries