Annual Report on the ECSC for the financial year 1998 together with the Commission's reply
Date: 1999-09-23
Institutions: European Court of Auditors
Subjects: ECSC, ECSC operating budget, European Court of Auditors, financial year, report

25.11.1999

EN

Official Journal of the European Communities

C 338/1

I

(Information)

COURT OF AUDITORS

ANNUAL REPORT ON THE ECSC

for the financial year 1998 together with the Commission(cid:146)s reply

(1999/C 338/01)

(Article 45c(4) of the ECSC Treaty and Article 88 of the Financial Regulation of 21 December 1977, as last
amended by Council Regulation (EC, ECSC, Euratom) No 2779/98 of 17 December 1998)

CONTENTS

Paragraph
reference

Page

CHAPTER 1 (cid:151) ECSC SOLVENCY AND DEVELOPMENTSCONCERNING MAIN ECSC ACTIVI-
TIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

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

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

1-15

1

2-7

2-3

4-5

6-7

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

8-10

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

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

11-13

14-15

CHAPTER 2 (cid:151) STATEMENT OF ASSURANCE CONCERNING THE ECSC . . . . . . . . . . . . . . .

16-20

TABLES 1 to 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission(cid:146)s reply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

2

2

2

2

3

3

3

3

4

5

8

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Official Journal of the European Communities

25.11.1999

CHAPTER 1

ECSC SOLVENCY AND DEVELOPMENTS CONCERNING MAIN
ECSC ACTIVITIES

3. At 31 December 1998 the ECSC(cid:146)s solvency ratio was 32,8 %
compared with 28,3 % at 31 December 1997. The change was due
partly to the increase in the Guarantee Fund (+ 6 %) but mainly
to a substantial decrease in the volume of outstanding loans,
owing to the Commission(cid:146)s decision (2) to achieve a level of
reserves equal to 100 % of loans outstanding after 2002 which
are not covered by a State guarantee. Consequently, the solvency
ratio will gradually approach 100 %.

Introduction

1. This chapter concerns the ECSC(cid:146)s solvency at 31 December
1997 and the changes in its main budgetary and financial activi-
ties during the year. The ECSC(cid:146)s solvency is of particular interest
for the following reasons:

(a) apart from some marginal lending from the ECSC(cid:146)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;

(b) since most ECSC loans are back-to-back with the correspond-
ing 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(cid:146)s defaulting;

(c) the Treaty of Paris expires in 2002 and in consequence any
changes in the own funds needed to safeguard the ECSC(cid:146)s sol-
vency 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

2. Since 1994 the solvency ratio provided for in Council Direc-
tive 89/647/EEC has been the main instrument by which the
ECSC(cid:146)s solvency is assessed (1). The denominator of the ratio com-
prises 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(cid:146)s own
funds. The definition of own funds used in calculating the sol-
vency ratio is the result of an interpretation of the Directive which
provides a sufficiently prudent valuation.

(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.

Provision for large exposures

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 increas-
ingly small number of debtors. The risk generated by such a con-
centration of liabilities vis-(cid:224)-vis third parties was the subject of a
Council Directive on the monitoring and control of large expo-
sures 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).

5. The Commission established a provision for large exposures
in 1995 in order to offset the risk associated with this concentra-
tion. 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 situ-
ation, it does result in a policy which is sufficiently prudent as
regards the exposures resulting from past transactions. The provi-
sion decreased from ECU 27 million at 31 December 1997 to ECU
23 million at 31 December 1998. The change is due to the fall in
the assets in question following repayments in 1998.

(2) Questions concerning the expiry of the ECSC Treaty (cid:151) financial
activities (PV (96) 1306). Deliberations based on documents SEC(96)
1492-1493.

(3) Council Directive 92/121/EEC of 21 December 1992 on the monitor-
ing and control of large exposures of credit 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(cid:146)s commitment to any one client or group of
connected clients:
(a) the total exposure to any one client or group of connected clients

must not exceed 25 % of the ECSC(cid:146)s own funds,

(b) 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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Specific value adjustments

6. Under the Council Directives concerning annual accounts (1),
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 for specific value adjust-
ments for loans, including interest, fell from ECU 170 million at
31 December 1997 to ECU 130 million at 31 December 1998 (2),
i.e (cid:150) 24 %. This reduction is due, in particular, to the removal
from the balance sheet item (cid:145)current assets(cid:146) of a loan (3), includ-
ing the related value adjustment, to a defaulting debtor, which,
within the framework of the restructuring of its debt, issued new
paper in 1998 to replace a part of its borrowings. The value
adjustment in respect of this reduction would otherwise have
been ECU 185,2 million.

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 (4), and made the neces-
sary value adjustments.

Changes in applications of ECSC funds and resources

8. The commitments for the ECSC operating budget continued
to fall in 1998 (by 14,9 %, see Table 1). This trend is due, for the
most part, to a decrease in the aid given for retraining (ECU (cid:150) 25,1
million) and, to a lesser extent, to the absence of new interest sub-
sidies since no subsidised loan was granted in 1998 (5). In addi-
tion, commitments were ECU 60 million below the budgetary
estimates because of the decrease in retraining aid (traditional aid
and social aid, (ECU (cid:150) 30 million) and reconversion aid (ECU (cid:150) 30
million). As far as the latter are concerned, in particular, the Com-
mission submitted, on 10 June.1998, a proposal for a decision
pursuant to Article 95 of the ECSC Treaty in respect of the trans-
fer of ECU 60 million (ECU 30 million in 1998 and the same
amount in 1999) from the ECSC operating budget to the general

(1) 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. Council Directive
86/635/EEC of 8 December 1986 on the annual accounts and con-
solidated accounts of banks and other financial institutions, OJ L 372,
31.12.1986, p. 1.

(2) Financial Statements of the ECSC at 31 December 1998: specific value

adjustments for loans (ECU 130 million, note 5.1).

(3) Paragraph (b) of note 6.2 annexed to the Financial Statements of the

ECSC at 31 December 1998.

(4) 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.

(5) Adaptation of the loans/borrowings policy in view of the expiry of

budget of the European Union with a view to reinforcing the
Rechar II and Resider II (6) Community Initiatives. As the Council
issued an unfavourable opinion, this proposal was not adopted
and, consequently, the transfer was not made.

9. Resources continued to decline after an isolated increase in
1997 (7). This was mainly the result of two opposing factors: on
the one hand, the reduction to zero of the levy, for the first time,
and, on the other hand, a particularly large amount in decommit-
ments for the second consecutive year.

10.
In contrast with the estimates, the budget was in surplus for
the third consecutive year, which allowed the Guarantee Fund
(ECU + 30 million) and the provisions for the financing of the
ECSC operating budget (ECU + 26 million, see Tables 2 and 3) to
be bolstered even further. This provision will be used, if required,
in the course of subsequent financial years.

Changes in the ECSC balance sheet

11. The ECSC(cid:146)s balance sheet total declined by ECU 903 million
(15,2 %) between 31 December 1997 and 31 December 1998 (see
Table 4), mainly owing to the lower level of loans outstanding
from borrowed funds: during the financial year 1998, the ECSC
received ECU 690,6 million in loan reimbursements whereas it
disbursed only ECU 19,7 million of new loans (see Table 5).

12. The amount of outstanding loans from borrowed funds was
ECU 2 898 million on 31 December 1998. This item will con-
tinue to decline, falling to around ECU 730 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 1998. Following a Com-
mission decision (8), there must be no new loans that would tie
up reserves and mature after the expiry of the ECSC Treaty .

13. At 31 December 1997 the liquid asset accounts made up
39 % of the ECSC(cid:146)s assets and constituted the second largest item,
after loans. The accounts concerned and the main balancing items
under liabilities are shown in Table 6.

Conclusion

14. The financial year 1998 was the third consecutive year in
surplus, due, on the one hand, to a sizeable number of cancelled
commitments, and, on the other hand, to the fact that fewer com-
mitments were entered into than had been planned for. This

(6) Document SEC(98) 967 final.
(7) The reasons for this increase are given in paragraph 1.8 of the Annual
Report on the ECSC for the financial year 1997, OJ C 352, 18.11.1998.
(8) Adaptation of the loans/borrowings policy in view of the expiry of

the ECSC Treaty, OJ C 175, 28.6.1994.

the ECSC Treaty, OJ C 175, 28.6.1994.

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Official Journal of the European Communities

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surplus enabled the ECSC to reinforce its solvency substantially
and to make the necessary provisions and value adjustments.

15. With an eye to the expiry of the ECSC Treaty, the object of
the accumulated reserves is, firstly, to provide for the end of bud-
getary 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. In addition, in accor-
dance with the European Council(cid:146)s instructions, contained in its
resolution on growth and employment, which was adopted in
Amsterdam, the reserves available on that date will be placed in a
fund devoted to research in the coal and steel sector.

17. The accounts concerned are the financial statements of the
ECSC at 31 December 1998, which were drawn up under the
responsibility of the Commission and published in the Official
Journal of the European Communities (1).

18.
In its report on the ECSC(cid:146)s financial statements at 31 Decem-
ber 1998 (2), which incorporates the statement of assurance con-
cerning the reliability of the accounts and which is published
together with the financial statements concerned, the Court con-
cluded that the latter (cid:145)gave an accurate picture of the assets and of
the financial situation of the European Coal and Steel Community
at 31 December 1998, and of the result of its operations for the
financial year ending on the same date(cid:146).

CHAPTER 2

STATEMENT OF ASSURANCE CONCERNING THE ECSC

16. Pursuant to Article 45c of the Treaty establishing the Euro-
pean Coal and Steel Community (ECSC), the Court has examined
the ECSC(cid:146)s accounts so as to provide the European Parliament and
the Council with a statement of assurance concerning the re-
liability of the accounts and the legality and regularity of the
underlying transactions.

19. Furthermore, with a view to checking the legality and regu-
larity of the underlying transactions in the ECSC(cid:146)s accounts for
the financial year 1998, the Court carried out its audit in accor-
dance with generally accepted international auditing standards. In
particular, the audit was based on an analysis of the systems and
on tests.

In the Court(cid:146)s view, the legality and regularity of the transac-

20.
tions are, on the whole, adequately guaranteed.

This report was adopted by the Court of Auditors at the Court meeting of 22 and 23 September 1999.

For the Court of Auditors

Jan O. KARLSSON

President

(1) Financial Statements of the ECSC at 31 December 1998, published in

OJ C 240, 25.8.1999.

(2) Report on the Financial Statements of the ECSC at 31 December

1998, published in OJ C 240, 25.8.1999.

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Use of funds and changes in resources during the period 1991 to 1998

Table 1

Item

1991

1992

1993

1994

1995

1996

(million ECU)

1997

1998

Variation

(a)

(b)

(b) - (a)

A (cid:151) Use

Administrative expenditure

Commitments

Exceptional uses of funds

5,0

454,4

(cid:151)

5,0

477,2

85,9

5,0

5,0

5,0

5,0

5,0

5,0

(cid:151)

531,2

386,4

277,9

201,2

180,9

154,0

(cid:150) 26,9

7,1

32,5

(cid:151)

(cid:151)

(cid:151)

(cid:151)

(cid:151)

Total uses (A)

459,4

568,1

543,3

423,9

282,9

206,2

185,9

159,0

(cid:150) 26,9

B (cid:151) Resources of the year

Result of non-budgetary operations

Levy

Other budgetary resources (fines, rebates,
etc.)

254,7

175,0

131,5

146,5

201,3

121,3

112,5

107,7

90,8

102,3

95,6

95,9

4,4

90,0

(cid:151)

143,3

101,6

69,6

(cid:151)

(cid:150) 73,7

(cid:150) 101,6

4,3

12,3

195,2

134,2

(cid:151)

(cid:151)

+ 8,0

(cid:150) 61,0

(cid:151)

4,8

63,3

91,9

11,6

70,7

(cid:151)

Cancellations of commitments

Exceptional resources

32,3

(cid:151)

75,8

(cid:151)

94,0

(cid:151)

Total resources of the year (B)

462,0

353,8

416,6

380,2

275,4

285,9

444,4

216,1

(cid:150) 228,3

B - A

2,6

(cid:150) 214,3

(cid:150) 126,7

(cid:150) 43,7

(cid:150) 7,5

79,7

258,5

57,1

(cid:150) 201,4

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

(cid:150) 1,4

+ 163,2

+ 105,9

+ 43,3

+ 0,3

(cid:150) 58,6

(cid:150) 224,9

(cid:150) 26,0

+ 198,9

Transfer from (+)/to (-) reserves

(cid:151)

+ 53,0

+ 22,0

+ 2,0

+ 9,0

(cid:150) 19,0

(cid:150) 31,3

(cid:150) 30,0

Surplus for the financial year

1,2

1,9

1,2

1,6

1,8

2,1

2,3

1,1

+ 1,3

(cid:150) 1,2

Source: ECSC financial statements for the year in question.

Table 2

Movements against the provision for financing the ECSC operating budget (BOC) in 1998

Item

Balance at
31.12.1997

Utilisation

Allocation

Net change

(million ECU)

Balance at
31.12.1998

1. Available provision for financing the

ECSC operating budget

354,0

(cid:151)

+ 26,0

+ 26,0

380,0

2. Provision for fines and surcharges to be

paid subsequently and for subsidies to be
recovered (1)

87,7

Total

441,7

(cid:150) 8,9

(cid:150) 8,9

+ 17,2

+ 43,2

+ 8,3

+ 34,3

96,0

476,0

(1) Fines, surcharges and interest subsidies are considered to be ECSC resources only at the point when they have actually been paid.
Until then an amount equivalent to these claims is included in this provision. The ECU 96 million in question is thus not yeat
available as finance for the operating budget.

Source: ECSC financial statements at 31 December 1998, note 16.

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Table 3

ECSC own funds in 1998

Item (after allocation of surplus)

31.12.1997

Allocation

Withdrawal

31.12.1998

(million ECU)

Guarantee Fund (1)

Special reserve

Former Pension Fund

Surplus brought forward (1)

Provisions for large exposures

Available provision for financing the operating
budget

500,0

176,0

71,2

1,2

27,0

354,0

(1) Own funds used by the Commission in the numerator of the ECSC solvency ratio.
Source: ECSC financial statements at 31 December 1998.

Total

1 129,4

30,0

0,0

1,7

0,0

0,0

26,0

57,7

0,0

0,0

0,0

(cid:150) 0,5

(cid:150) 4,0

0,0

(cid:150) 4,5

530,0

176,0

72,9

0,7

23,0

380,0

1 182,6

Changes in the ECSC summary balance sheet, before allocation of surplus, from 31 December 1997 to 31
December 1998

Table 4

31.12.1997

31.12.1998

million ECU

%

million ECU

%

Assets

Loans (to banks and undertakings)

Liquid assets (bank balances and bonds)

ECSC operating budget ((cid:145)ECSC OB(cid:146)) (levy, fines and
subsidies receivable)

Tangible and intangible assets

Other assets

Prepayments and accrued income

3 584

1 997

90

2

87

170

60,4

33,7

1,5

0,0

1,5

2,9

Total

5 930

100,0

Liabilities

Amounts owed (including bond issues)

Other liabilities

Accruals and deferred income

Provisions for liabilities and charges

Provisions for large exposures

ESCS OB (commitments and provisions)

Reserves and surplus

3 637

13

121

87

27

1 296

749

61,3

0,2

2,0

1,5

0,5

21,8

12,6

Source: ECSC financial statements at 31 December 1998.

Total

5 930

100,0

2 833

1 966

97

1

8

122

5 027

2 806

30

94

123

23

1 172

780

5 027

56,4

39,1

1,9

0,0

0,2

2,4

100,0

55,8

0,6

1,9

2,4

0,5

21,9

15,5

100,0

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Loans disbursed by the ECSC under Articles 54, 56 and 95, 1989 to 1998

Table 5

Article 54

Article 54.1

Article 54.2

Article 56

Article 95

Workers(cid:146)
housing

Year

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

195,7

243,1

438,7

215,2

7,6

108,9

60,5

52,4

194,1

(cid:151)

30,0

155,2

66,3

831,8

209,7

347,0

25,7

25,2

122,4

(cid:151)

Source: 1998 figures obtained from Commission (DG II).

(million ECU)

Total

700,1

993,8

1 382,2

1 486,2

918,3

673,4

402,8

279,7

541,2

19,7

(cid:151)

(cid:151)

(cid:151)

(cid:151)

(cid:151)

(cid:151)

42,3

15,6

(cid:151)

(cid:151)

16,0

10,1

17,7

13,0

12,9

8,7

14,1

19,4

17,9

19,7

458,4

585,4

859,5

426,2

688,1

208,8

260,2

167,1

206,8

(cid:151)

Table 6

Changes in ECSC liquid assets and principal balancing items, 31 December 1997 to 31 December 1998

Balance sheet item

31.12.1997

31.12.1998

(million ECU)

Liquid assets

Balances with central banks

Loans and advances to credit institutions

(cid:151) repayable on demand

(cid:151) with agreed maturity dates or periods of notice

Bonds

0,6

0,0

6,4

367,4

1 623,5

Total liquid assets

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

500,0

354,1

853,8

170,2

87,4

27,0

Source: ECSC financial statements at 31 December 1998.

Total principal balancing items

1 992,5

1 881,2

5,7

400,7

1 559,2

1 965,6

530,0

380,0

695,7

129,6

122,9

23,0

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COMMISSION(cid:146)S REPLY

The Commission has no particular remark to make. It is pleased that the Court of Auditor(cid:146)s report contains
no criticism and that a positive statement of assurance is proposed.