Report on the Union's facility providing medium-term financial assistance for Member States' balances of payments pursuant to Article 10 of Council Regulation (EC) No 332/2002

1.Summary

This is a report of the Commission to the Council on the use of the Union’s facility providing medium-term financial assistance for Member States’ balances of payments pursuant to Council Regulation (EC) No 332/2002 of 18 February 2002 (the ‘BoP Regulation’ or ‘BoP Instrument’). On the basis of this report by the Commission and taking into account the opinion of the Economic and Financial Committee (EFC), the Council is required to examine the extent to which the instrument still serves its purpose in terms of its principle, arrangements and the ceiling for outstanding loans under the instrument.

Since 2012, Romania has requested and received precautionary assistance under the instrument. Hungary repaid its loan in April 2016 whereas EUR 0.7 billion in loans to Latvia is still outstanding. These beneficiary Member States saw the sustainability of their balance of payments situation improve rapidly, enabling renewed access to market-based financing.

The Commission assesses the instrument as follows:

·Since the last revision in May 2009, the instrument has proven its effectiveness given that beneficiary Member States have seen the sustainability of their balance of payments improve rapidly and have quickly regained access to market-based financing.

·Currently at EUR 50 billion, the ceiling for outstanding loans (in terms of principal) and credit lines under the instrument appears appropriate.

·The modifications suggested in the Commission proposal for a new Council regulation (COM(2012) 336 final) remain both necessary and appropriate: developments in the regulatory framework and the same borrowing rules as those under Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism should be introduced and the use of credit lines clarified. In addition, it should be clarified that the instrument may be used to finance the (indirect) recapitalisation of credit institutions and that policy conditions may be adjusted primarily to address these problems.

2.Introduction

Pursuant to the BoP Regulation, the BoP Instrument was created to provide Union medium-term financial assistance to Member States which have not adopted the euro (Member States with a derogation) and are experiencing, or are threatened with, difficulties in their balance of payments. This financial assistance is either in the form of an EU loan or a credit line. Furthermore, the BoP Regulation stipulates that the Council should regularly examine the extent to which the instrument still serves its purpose in terms of its principle, arrangements and ceiling. The Council examination should be made on the basis of a report from the Commission and after the EFC has delivered an opinion.

Based on its most recent assessment, the Commission submitted a proposal dated 22 June 2012 (COM(2012) 336 final) to modify the BoP Regulation. However, Council members were unable to agree a common position because of objections by one Member State.

3.State of play and appropriateness of the BoP Instrument

Since 2012, one Member State, Romania, has requested and received assistance under the instrument. The assistance was formally agreed in October 2013 and expired in September 2015. It ran in parallel with a stand-by arrangement (SBA) of the International Monetary Fund (IMF). As with the agreement covering 2011-13, the assistance available for 2013-15 was treated as precautionary and not drawn upon.

The precautionary assistance by the EU amounted to EUR 2 billion, while the IMF contributed up to SDR 1.75 billion (around EUR 2 billion) on the basis of an equally precautionary SBA. The aim of the supported adjustment programme was to assist Romania in consolidating macroeconomic, fiscal and financial stability, and in so doing increase the resilience and growth potential of its economy; improve its administrative capacity; reform the tax administration; improve public financial management; and restructure state-owned enterprises.

Hungary fully repaid its loan in April 2016 whereas EUR 0.7 billion of Latvia’s loan is still outstanding. The precautionary assistance for Romania, following up on two previous arrangements (one of which on a precautionary basis), has demonstrated the versatility of the instrument. Romania still had EUR 3.5 billion left to repay from the non-precautionary support disbursed in 2010-11.

Table 1: Residual repayment obligations under the BoP Instrument (as of August 2017)

Year Country Capital

repayment Interest

payment Grand Total 2017 Latvia 6 6 Romania 1,150 32 1,182 2018 Latvia 23 23 Romania 1,350 77 1,427 2019 Latvia 500 23 523 Romania 1,000 34 1,034 2020 Latvia 6 6 2021 Latvia 6 6 2022 Latvia 6 6 2023 Latvia 6 6 2024 Latvia 6 6 2025 Latvia 200 6 206 Grand Total 4,200 231 4,431

In EUR million

Against this backdrop, the remaining capacity of the instrument currently stands at EUR 45.8 billion. No request for further support has been received so far.

Generally, all of the beneficiaries mentioned above saw the sustainability of their balance of payments situation improve rapidly, and therefore access to market-based financing could be re-established. Hence, the instrument fulfilled its role effectively.