[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 19.2.2008

SEC(2008) 18

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to the REPORT FROM THE COMMISSION to the budgetary authority on guarantees covered by the general budget situation at 30 June 2007 {COM(2008) 2 final}

TABLE OF CONTENTS

1. Explanatory notes on the situation of risks covered by the Budget 3

1.1. Tables A1 and A2 3

1.1.1. Authorised ceiling (Table A1) 3

1.1.2. Capital outstanding (Table A1) 4

1.1.3. Annual risk (Tables A2) 4

1.2. Loan operations covered by the Budget guarantee 7

1.3. Disbursement forecast 11

1.4. Payment of the Budget guarantee 13

1.4.1. Borrowing/lending operations 13

1.4.2. Guarantees given to third parties 13

1.4.3. Activation of Budget guarantees 14

2. Country-risk evaluation 15

2.1. Analyses on other countries 15

2.1.1. Former Yugoslav Republic of Macedonia 15

2.1.2. Bosnia and Herzegovina 15

2.1.3. Georgia 15

2.1.4. Tajikistan 16

2.1.5. Argentina 16

2.2. Explanatory notes for country-risk indicators 16

2.3. Country-risk indicators (tables) 18

1. EXPLANATORY NOTES ON THE SITUATION OF RISKS COVERED BY THE BUDGET

1.1. Tables A1 and A2

The purpose of Tables A1 and A2 is to show the outstanding amount of guarantees and annual repayments of capital and interest 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 Community 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.

In these tables, figures related to “New Member States” refer to the Member States which acceded to the European Union on 1 May 2004 and on 1 January 2007.

1. 1.1. Authorised ceiling (Table A1)

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

In order to relate it to the risk which the Budget might have to cover, account should be taken of the following factors which could affect it:

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 the 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 the Council Decisions 96/723/EC, 97/256/EC, 98/348/EC and 98/729/EC and a sharing of risk between the Community 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 lending operations with certain non-Member States authorised by the Council Decisions 99/786/EC, 2000/24/EC as amended and 2006/1016/EC, and a sharing of risk between the Community and the EIB as the Budget guarantee covers only political risks in some cases;

- operations already repaid, since the amounts concerned are the maximum amount of loans granted and not outstanding amounts authorised;

- the amounts authorised are not necessarily taken up in full.

Another factor to be considered is that some loans are disbursed in currencies. 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.

1.1.2. Capital outstanding (Table A1)

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

Compared with the previous aggregate, the amount outstanding does not include loans which have not yet been disbursed or the proportion of disbursed loans which have already been repaid.

1. 1.3. Annual risk (Tables A2)

Estimated amount of principal and interest due each financial year by each country according to disbursements made until 30 June 2007.

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1.2. Loan operations covered by the Budget guarantee

Tables A3a, A3b(1), A3b(2) and A4

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1.3. Disbursement forecast

The risk towards Member States should decrease in future as the loans are reimbursed under Euratom, MFA or EIB guaranteed lending. This situation could change in case some Member States which have not adopted the Euro call upon the Community medium-term financial assistance instrument (Balance-of-Payment)[2] or call upon the Euratom facility.

Graph A1: Annual Risk borne directly by the Budget in EUR million from 2007 to 2013 based on the amounts (capital and interest) due by Member States under all operations (MFA, Euratom and EIB) disbursed at 30 June 2007[3]

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At 30 June 2007, the EIB had still to disburse a total of EUR 6 649 million under the EUR 20 060 million current general mandate 2000 – 2007 for third countries:

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Graph A2: Disbursement forecast of EIB loans including the new general mandate, MFA and Euratom loans and total estimated outstanding covered by the Fund

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1.4. Payment of the Budget guarantee[4]

1.4.1. Borrowing/lending operations

In this type of operation, the Community borrows on the financial market and on-lends the proceeds (back-to-back) to Member States (balance of payments), third countries (Macro-financial assistance) or firms (Euratom).

The loan repayments are scheduled to match the repayments of the borrowings due from the Community. If the recipient of the loan is late in making a repayment, the Commission must draw on its resources to repay the borrowing on the due date.

The funds needed to pay the Budget guarantee in the event of late payment by the recipient of a loan granted by the Community are raised as follows:

a) the amount required may be taken provisionally from cash resources in accordance with Article 12 of Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000, as amended, implementing Council Decision (EC, Euratom) No 728/1994 of 31 October 1994, on the system of the Communities' own resources. This method is used so that the Community can immediately repay the borrowing on the date scheduled in the event of late payment by the recipient of the loan;

b) if the delay reaches to three months after the due date, the Commission draws on the Fund to cover the default. The funds obtained are used to replenish the Commission's cash resources;

c) the transfer procedure can be used to provide the Budget heading with the appropriations needed to cover the default. This method is used when there are insufficient appropriations in the Fund and must be authorised in advance by the budgetary authority;

d) the re-use of amounts repaid by debtors who have defaulted, leading to activation of the Community guarantee, allows payments to be made within a short period of time always providing, of course, that there are recovered funds available.

1.4.2. Guarantees given to third parties

The loan guarantee is in respect of loans granted by the EIB. When the recipient of a guaranteed loan fails to make a payment on the due date, the EIB asks the Community 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. The EIB administers the loan with all the care required by banking practice and is obliged to seek to recover the payments due after the guarantee has been activated.

Since the entry into force of the Regulation establishing a Guarantee Fund for external actions[5], the provisions of the Agreement between the Community and the EIB on management of the Fund state that, after the EIB calls in the guarantee in the event of a default, the Commission must authorise the Bank to withdraw the corresponding amounts from the Fund within three months.

If there are insufficient resources in the Fund, the procedure used for activating the guarantee is the same as for borrowing/lending operations.

An implementation agreement was concluded between the Community and the EIB on 20 and 22 January 1999 to determine payment and repayment procedures in connection with Community guarantees to the EIB. This agreement was revised in order to reflect the provisions of Council Decision (EC) No 1016/2006 of 19 December 2006 granting a Community guarantee to the EIB against losses under loans and loan guarantees for projects outside the Community[6]. The new Recovery Agreement, which has replaced the implementation agreement, was signed by the Community and the EIB on 1 and 29 August 2007.

1.4.3. Activation of Budget guarantees

If a borrower defaults on an EIB loan guaranteed by the Budget, the Community guarantee is called upon at the earliest three months after the date on which payment has fallen due. The Community will act within three months of receiving such a letter from the EIB calling for the guarantee to be activated, authorising the EIB to take the corresponding amounts from the Fund.

For loans granted by the EC or Euratom, default interest owed by loan beneficiaries for the time between the date on which cash resources are made available by the Budget and the date of activation of the Fund is drawn from the Fund and repaid to the Budget. For EIB loans, default interest 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.

2. COUNTRY-RISK EVALUATION

Other countries representing important risks to the Budget, notably through EC macro-financial assistance, Euratom loans or guarantees of EIB projects related lending, 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 also included in the risk evaluation. The country risk evaluation presented below comprises short analyses or tables of risk indicators.

2.1. Analyses on other countries[7]

2.1.1. Former Yugoslav Republic of Macedonia

In the former Yugoslav Republic of Macedonia, output growth accelerated markedly in the first half of 2007 to around 5.5% (in real terms), compared to 2.5% during the first half in 2006. The current account registered a minor deficit of 0.3% of GDP in 2006, which however turned into a slight surplus of about 1% of GDP during the first half of 2007, reflecting a continuously strong increase in metal exports and in private transfers. Gross FDI inflows came back to some 1% of GDP during the first half of 2007, after a single privatisation project in the energy sector had raised FDI inflows to nearly 6% of GDP in 2006. Early debt repayments reduced the external debt of the country by about 3 percentage points of GDP (to 34% of GDP) during the first half of 2007.

2.1.2. Bosnia and Herzegovina

In Bosnia and Herzegovina real GDP growth was 6.2% in 2006 and is projected to remain around 6% in 2007. The current account deficit almost halved to around 11% of GDP in 2006, but widened again to around 12% in the first half of 2007. The 2006 improvement was due to favourable export prices and the introduction of VAT which led to a more accurate reporting of export values and a frontloading of imports in the second half of 2005. After a two year decline of net FDI inflows as a share of GDP, the ratio is projected to exceed 10% of GDP in 2007. External public debt declined to around 21% of GDP at the end of 2006, bringing the total external debt close to 50% of GDP.

2.1.3. Georgia

In Georgia , the trade balance and the current account deteriorated in 2006 owing to strong import demand and sluggish export growth, as Georgia sought after new export markets in the aftermath of Russia's transport and trade blockade. The trade deficit for 2006 is estimated at 26% of GDP. The growth in remittances and official transfers cushioned the impact on the current account deficit which nonetheless is estimated to have widened to 13.8% of GDP (9.8 % in 2005). In 2007 the current account deficit is forecast to increase to 16% of GDP, notably because of the increase in the import price of natural gas while exports have not yet taken off substantially. The current account deficit is however financed comfortably by an inflow of foreign direct investment, and the external debt is not projected to increase from the current USD 1.7 billion. Georgia's external public debt as a percentage of GDP continued to decrease to about 22% (27% in 2005), and a further decline is projected for 2007 to around 18% thanks to the strong growth of the economy. Fitch assigned Georgia a sovereign credit rating BB- with a stable outlook in July 2007, reflecting notably the decline in the public debt burden.

2.1.4. Tajikistan

Tajikistan ’s economy has continued to grow strongly in 2006, recording a growth rate of 7% of GDP. The government budget is expected to register an increased deficit in 2007 of 14.1% of GDP (IMF estimate). Thanks to the successful bilateral debt agreements, in particular with Russia, Tajikistan’s largest creditor, and debt relief from the IMF MDRI initiative in 2006, external debt has fallen to 30.6% of GDP in 2006. A deteriorating trade deficit is only partly offset by the rapid growth in foreign remittances. The current account deficit is expected to increase sharply from 2.5% in 2006 to about 14.1% in 2007. Import coverage of gross official reserves remains relatively low, around two months of imports. The IMF PRGF arrangement was successfully completed in 2006. The authorities have started the preparation of a successor arrangement, possibly under the PSI programme (IMF Policy Support Instrument).

2.1.5. Argentina

The Argentinean economy continues to grow rapidly, led by strong domestic investment and consumption, and is expected to expand by more than 8% in 2007. However, several years of buoyant growth and an undervalued peso have led to increased inflationary pressures. The authorities have previously undertaken a series of measures to curb price increases, Inflation is now suspected to be well into double-digits. The foreign trade dynamism, resulting from both strong world demand for commodities and the policy of exchange rate undervaluation, has allowed the country to run large current account surpluses above 3% of GDP. The strength of the economy has also led to a significant improvement in public finances. However, the primary surplus looks certain to deteriorate this year as a result of pre-election spending, and unless more restrictive policies are put in place, the Argentinean economy risks overheating. Moreover, uncertainties concerning the legal framework and government policy towards public utilities persist and continue to have detrimental effects on the confidence of foreign investors. Finally, Argentina remains in arrears to the EIB, having failed to pay the penalty interest (USD 1.7 million) steaming from previous arrears on a Regional Road Transportation project.

2.2. Explanatory notes for country-risk indicators

Standard footnotes

a) Includes only EC and EIB loans (outstanding disbursements) to CEEC, NIS and MED.

b) The higher the ranking number, the lower the creditworthiness of the country.

Countries are rated on a scale of zero to 185; 185 represents the least chance 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.

Abbreviations and English words used in tables

S&P | Standard and Poor's |

CCFF | Compensatory and Contingency Financing Facility |

EFF | Extended Fund Facility |

FDI | Foreign Direct Investment |

GDP | Gross Domestic Product |

SBA | Stand-By Arrangement |

STF | Systemic Transformation Facility |

est. | estimates |

m EUR | EUR million |

bn USD | USD billion |

n.a. | not available |

2.3. Country-risk indicators (tables)

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

[2] Council Regulation (EC) No 332/2002 of 18 February 2002, OJ L 53, 23.2.2002, p. 1. This facility is limited to EUR 12 billion and has not yet been used.

[3] As of 31 December 2006, the 2007 annual risk for Member States was EUR 812 million.

[4] The Communities have granted loans and guaranteed loans to accession countries. Those loans and guarantees were covered by the Guarantee Fund and remain outstanding or in force after the date of accession. From that date, they cease to be external actions of the Communities and are therefore covered directly by the Budget.

[5] Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions, OJ L 293, 12.11.1994, p.1, as amended by Council Regulation (EC, Euratom) No 1149/1999 of 25 May 1999, OJ L 139, 2.6.1999, p. 1, Council Regulation (EC, Euratom) No 2273/2004 of 22 December 2004, OJ L 396, 31.12.2004, p. 28, and Council Regulation (EC, Euratom) No 89/2007 of 30 January 2007, OJ L 22, 31.1.2007, p. 1.

[6] OJ L 414, 30.1.2.2006, p. 95.

[7] In this Section 2.1, other countries than those presented in the main report (see Chapter 7) are analysed.