Annual Report on the ECSC for the financial year 1997 together with the Commission's reply
Date: 1998-10-15
Institutions: European Court of Auditors
Subjects: ECSC, ECSC operating budget, European Court of Auditors, financial year, report

18.11.98

EN

Official  Journal  of  the  European  Communities

C 352/1

I

(Information)

COURT  OF  AUDITORS

ANNUAL  REPORT  ON  THE  ECSC

for  the  financial  year  1997  together  with  the  Commission’s  reply

(98/C 352/01)

(Article  88  of  the  Financial  Regulation  of  21  December  1977,  as  last  amended  by  Council
Regulation  (EC,  Euratom,  ECSC)  No  2335/95  of  18  September  1995)

TABLE  OF  CONTENTS

Paragraph  reference

Page

CHAPTER  1  —  ECSC  SOLVENCY  AND  DEVELOPMENTS  CONCERNING
MAIN  ECSC  ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1—1.14

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1

The  solvency  of  the  ECSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2—1.7

Solvency ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2—1.3

Provision  for  large  exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.4—1.5

Specific  value  adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.6—1.7

Changes  in  applications  of  ECSC  funds  and  resources . . . . . . . . . . . . . . . . . . . . . .

1.8

Changes  in  the  ECSC  balance  sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.9—1.13

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.14

CHAPTER  2  —  STATEMENT  OF  ASSURANCE  CONCERNING  THE  ECSC. .

2.1—2.5

TABLES  1—6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The  Commission’s  reply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

2

2

2

2

3

3

3

4

4

5

8

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CHAPTER  1

ECSC  SOLVENCY  AND  DEVELOPMENTS  CONCERNING
MAIN  ECSC  ACTIVITIES

Introduction

This  chapter  concerns  the  ECSC’s  solvency  at
1.1.
31 December 1997 and the changes in its main budgetary
and  financial  activities  during  the  year.  The  ECSC’s
solvency 
interest  for  the  following
reasons:

is  of  particular 

— apart  from  some  marginal  lending  from  the  ECSC’s
own  funds,  ECSC 
loans  are  financed  by  bank
borrowings  and  bond  issues.  It  is  therefore  important
for ECSC securities to have the best possible financial
market  ratings.  That,  in  turn,  requires  an  excellent
solvency level;

— since  most  ECSC  loans  are  back-to-back  with  the
corresponding borrowings (in terms of rates, currency
and maturity), the main remaining banking risk is the
risk  of  non-recovery.  Other  risks  may  arise  if  the
balance between loans and borrowings is disturbed by
a  debtor’s  defaulting;

— the  Treaty  of  Paris  expires 

in  2002  and 

in
consequence  any  changes  in  the  own  funds  needed  to
safeguard  the  ECSC’s  solvency  must  be  monitored
carefully,  right  up  to  the  expiry  of  the  Treaty,  and
beyond  that  date,  to  ensure  that  the  remaining
borrowings  can  be  serviced.

The  solvency  of  the  ECSC

Solvency ratio

Since  1994  the  solvency  ratio  provided  for  in
1.2.
Council  Directive  89/647/EEC  has  been 
the  main
instrument  by  which  the  ECSC’s  solvency  is  assessed (1).
The  denominator  of  the  ratio  comprises  assets  and
off-balance-sheet  items  weighted  in  accordance  with  the
Directive.  For  the  numerator,  however,  the  Commission
takes  the  Guarantee  Fund  and  unallocated  surplus  items
and omits others which might be considered to form part
of  the  ECSC’s  own  funds  (see  paragraph  1.8).  The
definition  of  own  funds  used  in  calculating  the  solvency
ratio  is  the  result  of  an  interpretation  of  the  Directive
which  provides  a  sufficiently  prudent  valuation.

1.3.
At  31  December  1997  the  ECSC’s  solvency  ratio
was  28,3 %  compared  with  21,1 %  at  31  December

(1) Council  Directive  89/647/EEC  of  18  December  1989  on  a
solvency  ratio  for  credit  institutions  (OJ  L  386,  30.12.1989,
p.  14)

1996.  The  change  was  due  partly  to  the  increase  in  the
Guarantee  Fund  (+ 6,7 %)  but  mainly  to  a  substantial
decrease in the volume of outstanding loans, owing to the
reduction  in  ECSC  activity  as  the  Treaty  approaches
expiry.  On  11  September  1996 (2),  the  Commission
confirmed its desire to keep the level of reserves at 100 %
of loans outstanding after 2002 which are not covered by
a  State  guarantee.  To  do  this,  the  Guarantee  Fund  needs
to  be  increased  each  year  until  2002.  Consequently,  the
solvency  ratio  will  gradually  approach  100 %.

Provision  for  large  exposures

1.4.
The  expiry  of  the  Treaty  of  Paris  in  2002  is
already  having  a  significant  effect  on  the  level  of  ECSC
activity.  The  loan  portfolio  is  shrinking  steadily  and
becoming  concentrated  on  an  increasingly  small  number
of debtors. The risk generated by such a concentration of
liabilities  vis-à-vis  third  parties  was  the  subject  of  a
Council Directive on the monitoring and control of large
exposures of credit institutions) (3). The Court referred to
the  two  limits  provided  for  in  the  Directive  in  its  reports
on the ECSC for the financial years 1994 (paragraph 1.5)
and  1995  (paragraph  1.6) (4).

1.5.
The  Commission  established  a  provision  for  large
exposures  in  1995  in  order  to  offset  the  risk  associated
with  this  concentration.  The  amount  of  the  provision  is
calculated  as  a  function  of  the  amounts  by  which  the
above  two  limits  have  been  exceeded,  as  specified  in
Annex VI to Council Directive 93/6/EEC (5). Although the
Directive is not directly applicable to the ECSC situation,
it  does  result  in  a  policy  which  is  sufficiently  prudent  as
regards  the  exposures  resulting  from  past  transactions.
The  provision  decreased  from  ECU  36  million  at
31  December  1996  to  ECU  27  million  at  31  December
1997.  The  change  is  due  to  the  fall  in  the  assets  in
question  following  repayments  in  1997.

(2) Questions  concerning  the  expiry  of  the  ECSC  Treaty
financial  activities  (PV(96)  1306).  Discussion  on  the  basis  of
documents  SEC(96)  1492/1493.

(3) Council  Directive  92/121/EEC  of  21  December  1992  on  the
large  exposures  of  credit

monitoring  and  control  of 
institutions  (OJ  L  29,  5.2.1993,  p.  1).

(4) Annual  report  concerning  the  ECSC  for  the  financial  year
1994 (OJ C 329, 7.12.1995, p. 3). Annual report concerning
the  ECSC  for  the  financial  year  1995  (OJ  C  377,
13.12.1996, p. 3: The limits apply to the value of the ECSC’s
commitment  to  any  one  client  or  group  of  connected
clients:
— the  total  exposure  to  any  one  client  or  group  of
connected  clients  must  not  exceed  25 %  of  the  ECSC’s
own  funds,

— the  total  volume  of  large  exposures  must  not  exceed
800 % of the said own funds. The exposure is deemed to
be  large  if  the  total  exposure  to  any  one  client  or  group
of  connected  clients  is  10 %  or  more  of  own  funds.
(5) Council Directive 93/6/EEC of 15 March 1993 on the capital
adequacy  of  investment  firms  and  credit  institutions  (OJ
L  141,  11.6.1993,  p.  1).

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C 352/3

Specific  value  adjustments

Changes  in  the  ECSC  balance  sheet

1.6.
Under  the  Council  Directives  concerning  annual
accounts) (6) (7),  the  asset  items  in  the  balance  sheet  must
be valued individually and must be the subject of specific
value adjustments if necessary. The amount shown in the
balance  sheet  by  way  of  specific  value  adjustments  for
loans,  including  interest,  fell  from  ECU  193  million  at
31  December  1996  to  ECU  170  million  at  31  December
1997 (8). This 12 % reduction is due, in particular, to the
recalculation  of  the  value  adjustment  in  respect  of  a
significant  debtor  following  the  restructuring  of  its  debt.

1.7.
The  Commission  also  reviewed  the  financial
position  of  the  other  high-risk  debtors,  namely  those
whose  debts  to  the  ECSC  were  not  covered  by  first-class
guarantees (9), and made the necessary value adjustments.
No  further  borrowers  defaulted  in  1997.

Changes  in  applications  of  ECSC  funds  and  resources

1.8.
The  commitments  for  the  ECSC  operating  budget
continued  to  fall  in  1997  (by  10 %,  see  Table  1),  whilst
the level of resources from the year increased appreciably
beyond the estimates, mainly for two reasons: firstly, due
to major decommitments (ECU 195,2 million, more than
half  of  which  stems  from  subsidies  committed  under
Article  56(2)(a));  secondly,  due  to  a  re-evaluation  of  the
ECSC’s  claims  on  a  major  debtor 
the
restructuring  of 
its  debt  (see  paragraph  1.6).  The
corresponding  surplus  made  it  possible  to  allocate  a
further  ECU  31,3  million  to  the  Guarantee  Fund  and  to
produce  a  net  increase  of  ECU  224,9  million  in  the
provision  available  for  financing  the  ECSC  operating
budget  (see  Table  2),  thereby  considerably  increasing  the
ECSC’s  own  funds  (see  Table  3).  This  provision  for  the
financing  of  future  operational  budgets  should  make  it
possible  to  absorb  the  1998  reduction  of  the  rate  of
ECSC levy to zero, and should thus be utilised during the
financial  years  1998  to  2002.

following 

(6) Fourth  Council  Directive  of  25  July  1978,  based  on  Article
54(3)(g)  of  the  Treaty,  on  the  annual  accounts  of  certain
types  of  companies  (78/660/EEC)  (OJ  L  222,  14.8.1978,  p.
11).

(7) Council  Directive  86/635/EEC  of  8  December  1986  on  the
annual  accounts  and  consolidated  accounts  of  banks  and
other  financial  institutions  (OJ  L  372,  31.12.1986,  p.  1).
(8) ECSC  financial  statements  at  31  December  1997:  specific
value  adjustments  for  loans  (ECU  170  million,  note  5.1).
(9) ‘First-class guarantees’ are guarantees from Member States of
the  EU  or  the  equivalent  (public  institutions  and  public
industrial  corporations  of  Member  States)  and  bank
guarantees.

1.9.
The  ECSC’s  balance  sheet  total  declined  by  ECU
1 080  million  (15,4 %)  between  31  December  1996  and
31  December  1997  (see  Table  4),  mainly  owing  to  the
lower  level  of  loans  outstanding  from  borrowed  funds:
during  the  financial  year  1997,  the  ECSC  received  ECU
1 661  million 
it
disbursed  only  ECU  541,2  million  of  new  loans.

loan  reimbursements  whereas 

in 

The  volume  of  new  loans  disbursed  was  double
1.10.
that  for  the  financial  year  1996  (see  Table  5).  The
increase in loans disbursed pursuant to Article 56(2)(a) is
linked  to  the  disbursement  of  the  last  eligible  loans  for
which  the  ECSC  had  received  a  request  by  31  December
1996,  the  deadline  for  entering  such  requests  in  the
accounts.  As  regards  loans  disbursed  pursuant  to  Article
54,  the  ECSC  disbursed  six  for  the  restructuring  and
modernisation of steel companies (Article 54(1)) and two
in  support  of  the  consumption  of  Community  steel
(Article  54(2)).

Furthermore,  in  paragraph  2.9  of  its  Annual
1.11.
Report  on  the  ECSC  concerning  the  financial  year  1995,
the  Court  noted  that  the  value  of  loans  disbursed  by  the
ECSC  for  the  construction  of  the  Great  Belt  bridge  was
approximately  twice  the  value  of  the  Community  steel
consumed  by  this  project.  The  Commission  replied  that,
as  a  result,  it  would  not  renew  the  proportion  of  these
loans  due  to  expire  in  1997.  The  Court  notes  that  the
loans concerned were indeed reimbursed in 1997 without
being  renewed  and  that  the  value  of  the  ECSC  loan
outstanding  on  this  project  (to  expire  in  2001)  is  within
the  prescribed  limits.

loans 

The  amount  of  outstanding 

1.12.
from
borrowed funds was ECU 3 600 million on 31 December
1997.  This  item  will  continue  to  decline,  falling  to
around  ECU  715  million  by  23  July  2002  (before  value
adjustments),  almost  90 %  of  which  will  not  be  covered
by  first-class  guarantees.  The  last  of  these  loans  will
mature in 2019. The above figures were calculated on the
basis  of  the  loans  disbursed  before  31  December  1997.
Following  a  Commission  Decision (10),  there  must  be  no
new loans to tie up reserves or mature after the expiry of
the  ECSC  Treaty.

1.13.
At  31  December  1997  the  liquid  asset  accounts
made  up  34 %  of  the  ECSC’s  assets  and  constituted  the
second  largest  item,  after  loans.  The  accounts  concerned

(10) Adaptation  of  the  ‘loans/borrowings’  policy  in  view  of  the

expiry  of  the  ECSC  Treaty  (OJ  C  175,  28.6.1994).

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18.11.98

and  the  main  balancing  items  under  liabilities  are  shown
in  Table  6.

statement  of  assurance  concerning  the  reliability  of  the
accounts and the legality and regularity of the underlying
transactions.

Conclusion

1.14.
The  financial  year  1997  showed  a  substantial
surplus  due,  in  particular,  to  a  sizeable  number  of
cancelled  commitments,  thus  enabling  the  ECSC  to
reinforce  its  solvency  substantially  and  to  make  the
necessary  provisions  and  value  adjustments.  In  view  of
the  expiry  of  the  ECSC  Treaty,  the  object  of  the
accumulated  reserves  is,  firstly,  to  provide  for  the  end  of
budgetary  activities  despite  the  1998  reduction  of  the
ECSC  levy  to  zero  and,  secondly,  gradually  to  bring  the
Guarantee Fund to a level corresponding to 100 % of the
amount of loans not backed by Member State guarantees
outstanding  at  23  July  2002,  after  deduction  of  the
specific  value  adjustments.

CHAPTER  2

STATEMENT  OF  ASSURANCE  CONCERNING  THE  ECSC

2.1.
Pursuant  to  Article  45c  of  the  Treaty  establishing
the  European  Coal  and  Steel  Community  (ECSC),  the
Court  has  examined  the  ECSC’s  accounts  so  as  to
provide  the  European  Parliament  and  the  Council  with  a

The  accounts  concerned  are 

financial
2.2.
statements  of  the  ECSC  at  31  December  1997,  which
were  drawn  up  under 
the
Commission  and  published  in  the  Official  Journal  of  the
European  Communities (11).

responsibility  of 

the 

the 

2.3.
In its report on the ECSC’s financial statements at
31  December  1997 (12),  which  incorporates  the  statement
of  assurance  concerning  the  reliability  of  the  accounts
and  which  is  published  together  with  the  financial
statements concerned, the Court concluded that the latter
gave an accurate picture of the assets and of the financial
situation  of  the  European  Coal  and  Steel  Community  at
31 December 1997, and of the result of its operations for
the  financial  year  ending  on  the  same  date.

2.4.
Furthermore,  with  a  view  to  checking  the  legality
and  regularity  of  the  underlying  transactions  in  the
ECSC’s  accounts  for  the  financial  year  1997,  the  Court
carried  out 
in  accordance  with  generally
accepted  international  auditing  standards.  In  particular,
the audit was based on an analysis of the systems and on
the  tests  carried  out.

its  audit 

In  the  Court’s  view,  the  legality  and  regularity  of
the  whole,  adequately

transactions  are,  on 

2.5.
the 
guaranteed.

This  report  was  adopted  by  the  Court  of  Auditors  in  Luxembourg  at  the  Court  meeting  of  14
and  15  October  1998.

For  the  Court  of  Auditors

Bernhard  FRIEDMANN

President

(11) Financial  statements  of  the  ECSC  at  31  December  1997,

published  in  OJ  C  255,  13.8.1998.

(12) Report  on  the  financial  statements  of  the  ECSC  at
31  December  1997,  published  in  OJ  C  255,  13.8.1998.

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C 352/5

Table  1

Use  of  funds  and  changes  in  resources  during  the  period  1991  to  1997

Item

1991

1992

1993

1994

1995

(million  ECU)

1996

1997

Variation

a

b

b − a

A  —  Use

Administrative  expenditure
Commitments
Exceptional  uses  of  funds

5,0
454,4
—

5,0
477,2
85,9

5,0
531,2
7,1

5,0
386,4
32,5

5,0
277,9
—

5,0
201,2
—

5,0
180,9
—

—
− 20,3
—

Total  uses  (A)

459,4

568,1

543,3

423,9

282,9

206,2

185,9

− 20,3

B  —  Resources  of  the  year

Result  of  non-budgetary  operations
Levy
Other  budgetary  resources  (fines,  rebates,
etc.)
Cancellations  of  commitments
Exceptional  resources

254,7
175,0

131,5
146,5

201,3
121,3

32,3
—

75,8
—

94,0
—

112,5
107,7

4,8
63,3
91,9

90,8
102,3

11,6
70,7
—

95,6
95,9

4,4
90,0
—

143,3
101,6

4,3
195,2
—

+ 47,7
+ 5,7

− 0,1
+ 105,2
—

Total  resources  of  the  year  (B)

462,0

353,8

416,6

380,2

275,4

285,9

444,4

+ 158,5

B − A

2,6

− 214,3

− 126,7

− 43,7

− 7,5

79,7

258,5

+ 178,8

Transfer  from  (+) / to  (−)  the  provision  for
financing  the  operating  budget

− 1,4

+ 163,2

+ 105,9

+ 43,3

+ 0,3

− 58,6

− 224,9

− 166,3

Transfer  from  (+) / to  (−)  reserves

—

+ 53,0

+ 22,0

+ 2,0

+ 9,0

− 19,0

− 31,3

− 12,3

Surplus  for  the  financial  year

1,2

1,9

1,2

1,6

1,8

2,1

2,3

+ 0,2

Source: ECSC  financial  statements  for  the  years  in  question.

Table  2

Movements  against  the  provision  for  financing  the  ECSC  operating  budget  (BOC)  in  1997

Item

Balance at
31.12.1996

Utilisation

Allocation Net  change

(million  ECU)

Balance at
31.12.1997

1. Available  provision  for  financing  the

ECSC  operating  budget

129,2

− 49,1

+ 274,0

+ 224,9

354,1

2. Provision for fines and surcharges to be
paid  subsequently  and  for  subsidies  to
be  recovered (1)

78,4

—

+ 9,2

+ 9,2

87,6

Total

207,6

− 49,1

+ 283,2

+ 234,1

441,7

(1) Fines,  surcharges  and  interest  subsidies  are  considered  to  be  ECSC  resources  only  when  they  have  actually  been  paid.
Until then an amount equivalent to these claims is included in this provision. The ECU 87,6 million in question is thus
not  yet  available  as  finance  for  the  operating  budget.

Source: ECSC  financial  statements  at  31  December  1997,  note  16.

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Table  3

ECSC  own  funds  in  1997

Item
(after  allocation  of  surplus)

31.12.1996

Allocation

Withdrawal

31.12.1997

(million  ECU)

Guarantee  Fund (1)

Special reserve

Former  Pension  Fund

Surplus  brought  forward (1)

Provisions  for  large  exposures

468,7

176,0

69,5

0,5

36,0

31,3

0,0

1,7

0,7

0,0

0,0

0,0

0,0

0,0

− 9,0

500,0

176,0

71,2

1,2

27,0

Available  provision  for  financing  the  operating
budget

129,2

224,9

0,0

354,1

Total

879,9

258,6

− 9,0

1 129,5

(1) Own  funds  used  by  the  Commission  in  the  numerator  of  the  ECSC  solvency  ratio.
Source: ECSC  financial  statements  at  31  December  1997.

Changes  in  the  ECSC  summary  balance  sheet,  before  allocation  of  surplus,  from  31  December  1996
to  31  December  1997

Table  4

31.12.1996

31.12.1997

million  ECU

%

million  ECU

%

Assets

Loans  (to  banks  and  undertakings)

Liquid  assets  (bank  balances  and  bonds)

ECSC  operating  budget  (‘ECSC  OB’)  (levy,  fines
and  subsidies  receivable)

Tangible  and  intangible  assets

Other  assets

Prepayments  and  accrued  income

4 583

2 126

80

3

20

198

65,4

30,3

1,1

0,0

0,3

2,8

3 584

1 997

90

2

87

170

60,4

33,7

1,5

0,0

1,5

2,9

Total

7 010

100,0

5 930

100,0

Liabilities

Amounts  owed  (including  bond  issues)

4 677

66,7

3 637

61,3

Other liabilities

Accruals  and  deferred  income

Provisions  for  liabilities  and  charges

Provisions  for  large  exposures

ECSC  OB  (commitments  and  provisions)

Reserves  and  surplus

Value  adjustment  reserve

78

160

75

36

1 268

715

1

1,1

2,3

1,1

0,5

18,1

10,2

0,0

13

121

87

27

1 296

749

0

0,2

2,0

1,5

0,5

21,9

12,6

0,0

Source: ECSC  financial  statements  at  31  December  1997.

Total

7 010

100,0

5 930

100,0

18.11.98

EN

Official  Journal  of  the  European  Communities

C 352/7

Table  5

Loans  disbursed  by  the  ECSC  under  Articles  54,  56  and  95,  1989-1997

Year

1989

1990

1991

1992

1993

1994

1995

1996

1997

Article 54

Article  54.1

Article  54.2

Article 56

Article 95

Workers’
housing

195,7

30,0

458,4

243,1

155,2

585,4

438,7

66,3

859,5

215,2

831,8

426,2

7,6

209,7

688,1

108,9

347,0

208,8

60,5

52,4

25,7

25,2

260,2

167,1

194,1

122,4

206,8

—

—

—

—

—

—

42,3

15,6

—

16,0

10,1

17,7

13,0

12,9

8,7

14,1

19,4

17,9

Source: Figures  obtained  from  Commission  (GD  II).

(million  ECU)

Total

700,1

993,8

1 382,2

1 486,2

918,3

673,4

402,8

279,7

541,2

Table  6

Changes  in  ECSC  liquid  assets  and  principal  balancing  items,  31  December  1996  to  31  December  1997

Balance-sheet  item

31.12.1996

31.12.1997

(million  ECU)

Liquid  assets

Balances  with  central  banks

Loans  and  advances  to  credit  institutions

— repayable  on  demand

— with  agreed  maturity  dates  or  periods  of  notice

Bonds

0,6

0,6

15,7

662,1

6,4

367,4

1 447,4

1 623,5

Total  liquid  assets

2 125,8

1 997,9

Principal  balancing  items

Guarantee  fund

Provisions  for  financing  the  ECSC  operating  budget

(Multiannual)  commitments  for  the  operating  budget

Specific  value  adjustments  in  respect  of  loans  and  advances

Provisions  for  liabilities  and  charges

Provision  for  large  exposures

468,7

129,2

1 059,9

193,1

75,0

36,0

500,0

354,1

853,8

170,2

87,4

27,0

Source: ECSC  financial  statements  at  31  December  1997.

Total  principal  balancing  items

1 961,9

1 992,5

C 352/8

EN

Official  Journal  of  the  European  Communities

18.11.98

COMMISSION’S  REPLY

The  Commission  has  no  particular  remark  to  make.  It  is  pleased  that  the  Court  of  Auditor’s
report  contains  no  criticism  and  that  a  positive  statement  of  assurance  is  proposed.