Report from the Commission to the Budgetary Authority on guarantees covered by the general budget - situation at 31 December 1999
Date: 2000-04-07
Institutions: European Commission
Subjects: Community budget, insured risk













EUR-Lex - 52000SC0573 - EN






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52000SC0573

Report from the Commission to the Budgetary Authority on guarantees covered by the general budget - situation at 31 December 1999  /* SEC/2000/0573 final */  









REPORT FROM THE COMMISSION TO THE BUDGETARY AUTHORITY on guarantees covered by the general budget  - situation at 31 December 1999REPORT FROM THE COMMISSION TO THE BUDGETARY AUTHORITY on guarantees covered by the general budget  - situation at 31 December 1999This report describes the situation as regards budget guarantees at the date of the report.It is in response to the statement made by the Commission, when the vote was taken on supplementary and amending budget No 1/91, that it would report to the budgetary authority twice a year on budget guarantees and the corresponding risks.This report is presented in accordance with Article 134 of the Financial Regulation applicable to the general budget of the European Communities.The Commission has already presented seventeen reports to the budgetary authority.The report is in two parts with an annex:1) Events since the last report, the risk situation and the activation of budget guarantees.2) Evaluation of potential risks. Economic and financial situation of non-Community countries benefiting from the most important operations.TABLE OF CONTENTSPart one Events since the report at 30 June 1999, the risk situation and activation of budget guarantees1. Introduction: types of operation1.1. Operations with macroeconomic objectives1.2. Operations with microeconomic objectives2. Events since the report at 30 June 19992.1. Romania2.2. Bulgaria2.3. Former Yugoslav Republic of Macedonia (FYROM)2.4. Tajikistan2.5. Moldova2.6. Community Guarantee to the European Investment Bank against losses under loans for reconstruction projects in the areas of Turkey hit by the earthquake2.7. Community Guarantee to the European Investment Bank against losses under loans for projects outside the Community (Central and Eastern Europe, Mediterranean countries, Latin America and Asia, South Africa)3. Risk situation3.1. Amount outstanding at the date of the report3.2. Maximum annual risk borne by the Community budget: operations disbursed at the date of the report3.3. Maximum theoretical annual risk borne by the Community budget4. Activation of budget guarantees4.1. Payments from cash resources4.2. Activation of the Guarantee Fund4.3. Arrears at the date of the report5. Analysis of the Community's theoretical lending and guarantee capacity in respect of non-member countries6. Situation of the guarantee fund at 31 December 19997. Relative solidity of the guarantee fundPart Two Evaluation of potential risks: Economic and financial situation of the non-member countries benefiting from the most important loan operations1. Introduction2. Accession CountriesBulgariaEstoniaLatviaLithuaniaRomania3. Western BalkansBosnia and HerzegovinaFormer Yugoslav Republic of Macedonia4. Newly Independent StatesArmeniaBelarusGeorgiaMoldovaTajikistanUkraine5. Other Non-Member CountriesAlgeriaAnnex1. Explanatory notes on the situation of risks covered by the community budget1.1. Tables 1 to 31.1.1. Authorised ceiling (Table 1)1.1.2. Capital outstanding ( Table 1)1.1.3. Annual risk (Tables 2 and 3)1.2. Loan operations covered by a budget guarantee1.3. Expected signature and disbursement of EIB loans1.4. Payment of the budget guarantee1.4.1. Borrowing/lending operations1.4.2. Guarantees given to third parties2. Methodological note on the analysis of the Community's estimated lending capacity in respect of non-member countries over the period 1997-99 under the Guarantee Fund mechanism (table 4)2.1. Reserve for loan guarantees to non-member countries2.2. Bases for the calculation of the provisioning of the Guarantee Fund2.3. Basis for the provisioning of the Fund in the event of a part guarantee2.4. Provisioning of the Guarantee Fund2.5. Margin remaining in the guarantee reserve2.6. Residual lending capacity3. Tables: country-risk indicatorsPart one Events since the report at 30 June 1999, the risk situation and activation of budget guarantees1. Introduction: types of operationThe risks covered by the Community budget derive from a variety of lending and guarantee operations which can be divided into two categories: loans with macroeconomic objectives and loans with microeconomic objectives.1.1. Operations with macroeconomic objectivesThe first of these are the balance of payments loans for Member States or non-member countries, normally carrying strict economic conditions and undertakings.This category includes the loan of EUR 1 250 million to finance imports of agricultural products and foodstuffs into the former Soviet Union, since the risk involved in this operation depends to a large extent on macroeconomic and political developments in the recipient countries.1.2. Operations with microeconomic objectivesThese are loans to finance projects which are usually repaid over the long term from funds which these projects are expected to generate; as a rule, they are granted to companies, financial institutions or non-member countries and, in addition to the Community guarantee, are covered by the usual guarantees demanded by banks.This covers Euratom and NCI loans in Member States and the Euratom and EIB loans outside the Community (Mediterranean countries, central and eastern Europe, countries of Asia and Latin America, Republic of South Africa).2. Events since the report at 30 June 1999The main events in the second half of 1999 were as follows:2.1. RomaniaOn 28 July 1999 the Commission presented a proposal for a Council Decision providing supplementary macro-financial assistance of EUR 200 million to Romania in the form of a loan with a maximum maturity of ten years. On 8 November 1999 the Council decided to grant supplementary macro-financial assistance of EUR 200 million to Romania in the form of a loan.2.2. BulgariaOn 28 July 1999 the Commission presented a proposal for a Council Decision providing supplementary macro-financial assistance of EUR 100 million to Bulgaria in the form of a loan with a maximum maturity of ten years. On 8 November 1999 the Council decided to grant supplementary macro-financial assistance of EUR 100 million to Bulgaria in the form of a loan.2.3. Former Yugoslav Republic of Macedonia (FYROM)On 28 July 1999 the Commission presented a proposal for a Council Decision providing supplementary macro-financial assistance of EUR 50 million to the Former Yugoslav Republic of Macedonia in the form of a loan with a maximum maturity of fifteen years and EUR 30 million in the form of donations. On 8 November 1999 the Council decided to grant supplementary macro-financial assistance of EUR 50 million to FYROM in the form of a loan and EUR 30 million in the form of non-repayable grants.2.4. TajikistanOn 26 July 1999 the Commission presented a proposal for a Council Decision amending Decision 97/787/EC providing exceptional financial assistance for Armenia and Georgia in order to extend it to Tajikistan. The amount to be granted is EUR 75 million in the form of a loan with a maximum maturity of fifteen years and EUR 35 million in the form of non-repayable grants. The Council had not adopted any formal decision at the time this report was drawn up.2.5. MoldovaOn 22 October 1999 the Commission presented a proposal for a Council Decision providing supplementary macro-financial assistance of EUR 15 million to Moldova in the form of a loan with a maximum maturity of ten years. The Council had not adopted any formal decision at the time this report was drawn up.2.6. Community Guarantee to the European Investment Bank against losses under loans for reconstruction projects in the areas of Turkey hit by the earthquakeOn 20 October 1999 the Commission presented a proposal for a Council Decision granting a Community guarantee to the European Investment Bank against losses under loans for reconstruction projects in the areas of Turkey hit by the earthquake. This guarantee is restricted to 65% of the aggregate amount of the credits opened, plus all related sums. The overall ceiling of the credits opened comes to EUR 600 million and covers a period of three years.On 29 November 1999 the Council granted a Community guarantee to the European Investment Bank against losses under loans for reconstruction projects in the areas of Turkey hit by the earthquake. This guarantee is restricted to 65% of the aggregate amount of the credits opened, plus all related sums. The overall ceiling of the credits opened comes to EUR 600 million and covers a period of three years beginning on 29 November 1999.2.7. Community Guarantee to the European Investment Bank against losses under loans for projects outside the Community (Central and Eastern Europe, Mediterranean countries, Latin America and Asia, South Africa)On 23 April 1999 the Commission presented a proposal for a Council Decision granting a Community guarantee to the European Investment Bank against losses under loans for projects outside the Community (central and eastern Europe, Mediterranean countries, Latin America and Asia, and the Republic of South Africa).The proposal concerns the renewal of the budget guarantee which the Community granted to the EIB on 14 April 1997.On 22 December 1999 the Council granted a Community guarantee to the European Investment Bank against losses under loans for projects outside the Community (central and eastern Europe, Mediterranean countries, Latin America and Asia, and the Republic of South Africa).This guarantee is restricted to 65% of the aggregate amount of the credits opened, plus all related sums. The overall ceiling of the credits opened is equivalent to EUR 18 410 million, broken down as follows:- Central and Eastern Europe: EUR 8 680 million- Mediterranean countries: EUR 6 425 million- Latin America and Asia: EUR 2 480 million- Republic of South Africa: EUR 825 millionand covers a period of seven years beginning on 1 February 2000 for Central and Eastern Europe, the Mediterranean countries and Asian and Latin American countries and on 1 July 2000 for the Republic of South Africa, and ending on 31 January 2007 for all regions.The European Investment Bank is invited to aim to cover the commercial risk on 30% of its lending under this decision from non-sovereign guarantees, if possible on an individual regional mandate basis. This percentage is to be increased whenever possible, insofar as the market permits.3. Risk situationThere are two possible methods for evaluating the risks borne by the Community budget:- the method, often used by bankers, of the total amount of capital outstanding for the operations concerned on a given date (the situation described in table 1 below),- the more budgetary approach of calculating the maximum amount which the Community could have to pay out in each financial year.The second approach itself has been applied in two different ways:- by reference only to actual disbursements at 31 December 1999, assuming that there are no early repayments (see Table 2 below showing the lower limit of this maximum risk to the Community budget);- on a more forward-looking basis, by reference to all the operations decided by the Council or proposed by the Commission in order to estimate the impact on future budgets, assuming that the Commission's proposals are accepted (see Table 3 below showing the upper limit of this maximum risk borne by the Community budget).The latter exercise gives some idea about the future level of risks connected with the proposals made. However, a number of assumptions have to be made about dates of disbursement and terms of repayment (details are given in the annex) as well as interest [1] and exchange rates [2][1]  An average interest rate of 10% is assumed for EIB loans. The average interest rate assumed for borrowing and lending operations is 4.4%. An interest rate of 3.4675% has been applied for the new operations in Table 3.[2]  The exchange rates used for loans in currencies other than the euro are those of 31 December 1999.The results are shown in Tables 1 to 3 which assess the risk relating to countries inside the Community and countries outside the Community.The overall figures quoted cover risks of different types; loans to one country in the case of macrofinancial assistance and loans for projects guaranteed by the borrowers in the case of NCI and EIB operations, for example.The following analysis distinguishes between total risk, the risk in respect of Member States and the risk in respect of non-member countries.3.1. Amount outstanding at the date of the reportThe amount outstanding is set out in Table 1.The total risk at the date of the report came to EUR 14 524 million, as against EUR 13 088 million at the end of the previous semester, an increase of 11%. [3][3]  Part of the change over the past six months is due to exchange rate differences on loans in currencies other than the euro.The following table shows the operations which have had an effect on the amount outstanding since the last report.EUR millionAmount outstanding at 30 June 1999   //  13 088Loan repaymentsBalance of payments: ItalyEuratomNCIFinancial assistanceFormer Soviet UnionEIB  //0,0- 1,3- 27,7-10,00,0- 216,2Loans disbursedFinancial assistanceEIB   //+ 108+ 1 365Exchange rate differences between euro and other currencies  //  + 218,2Amount outstanding at 31 December 1999  //  14 524The capital outstanding in respect of operations in the Member States was EUR 2 694 million at 31 December 1999, a fall of 1.6% compared with 30 June 1999.The capital outstanding from non-member countries at the date of the report was EUR 11 830 million, an increase of 14.3% compared with the previous semester.3.2. Maximum annual risk borne by the Community budget: operations disbursed at the date of the reportThe maximum annual risk is set out in Table 2.The total annual risk comes to EUR 4 060 million in 2000.- The risk in respect of the Member States comes to EUR 2 733 million in 2000 when Italy's last repayment is due.- The risk in respect of non-member countries in 2000 comes to EUR 1 328 million.The risk in respect of non-member countries will average EUR 1 356 million over the period 2001-2008.3.3. Maximum theoretical annual risk borne by the Community budgetThe situation is set out in Table 3.This risk comes to EUR 4 138 million in 2000 and will then stabilise at an average of EUR 2 500 million between 2001 and 2008.- The trend in the maximum risk in respect of the Member States is the same as in Table 2.- The risk in respect of non-member countries amounts to EUR 1 405 million in 2000. The risk will increase by an average of 13% a year from 2001 until 2008.&gt;REFERENCE TO A GRAPHIC&gt;&gt;REFERENCE TO A GRAPHIC&gt;&gt;REFERENCE TO A GRAPHIC&gt;4. Activation of budget guarantees4.1. Payments from cash resourcesThe Commission draws on its cash resources under Article 12 of Council Regulation No 1552/89 of 29 May 1989 implementing Decision 88/376/EEC, Euratom on the system of the Communities' own resources to avoid delays and resulting costs in servicing its borrowing operations when a debtor is late in paying.4.2. Activation of the Guarantee FundCouncil Regulation (EC, Euratom) No 2728/94 of 31 October 1994 established a Guarantee Fund for external action. In the event of late payment by a recipient of a loan granted by the Community, the Guarantee Fund is called on to cover the default within three months of the date on which is payment is due. If a borrower defaults on an EIB loan guaranteed by the Community budget, the Community will act within three months of receiving a letter from the Bank calling for the guarantee to be activated. The Commission will then authorise the Bank to take the corresponding amounts from the Guarantee Fund.Penalty interest for the time between the date on which cash resources are made available and the date of activation of the Fund is drawn from the Fund and repaid to the cash resources.In the last six months the Fund has been called on to honour guarantees for the following debtors:&gt;TABLE POSITION&gt;4.3. Arrears at the date of the report  [4][4]  Arrears due from Tajikistan on the EUR 1 250 million loan which the Community granted to the former Soviet Union and its republics and arrears on the EIB loan granted to former Yugoslavia under the Mediterranean protocols. The figures include defaults covered by the budget.Arrears due from non-member countries at the date of the report&gt;TABLE POSITION&gt;(1) The breakdown of unpaid amounts between the republics of former Yugoslavia is intended as a guide.(2) The guarantees activated in respect of EIB operations include amounts not paid on time and the default interest incurred when the Community guarantee enters into force.(3) Default interest entered in the accounts between the date on which the guarantee is activated and the date of the report. The amount shown is the total default interest for all the republics of former Yugoslavia.5. Analysis of the Community's theoretical lending and guarantee capacity in respect of non-member countriesIn practice, the Guarantee Fund and reserve facility limits the Community's lending and guarantee capacity to non-member countries since the appropriations available for provisioning the Fund whenever a new lending decision is adopted (or any annual tranche in the case of guarantees for multiannual operations) are limited by the amount entered for the guarantee reserve in the financial perspective [5][5]  The figure entered in the 2000-2006 financial perspective is EUR 200 million at 1999 prices.At any given time, lending capacity corresponds to the margin remaining in the guarantee reserve. This margin is equal to the difference between the reserve and the estimated amount needed to provision the Guarantee Fund for operations which have already been adopted and which are in preparation.Table 4 contains an estimate of the Community's lending capacity in respect of non-member countries over the period 1999-2001 compatible with the Guarantee Fund mechanism. The method of calculation and references to legal texts are set out in greater detail in the Annex.On the basis of the decisions adopted by the Council and decisions proposed and in preparation (see Table 4), EUR 176 million is expected to be used from the guarantee reserve in 2000, leaving EUR 27 million available at the end of the year.If account is taken of the effect on the guarantee reserve of the provisioning of the Fund in respect of loans already decided and loans proposed and in preparation for 2000, the annual capacity available for loans is as follows:- EUR 297 million for loans with a 100% guarantee under the Community budget;- EUR 457 million for loans with a 65% guarantee (in accordance with Council Decision 2000/24/EC of 22 December 1999).The current estimates in Table 4 for the provisioning of the Fund in 2001 show that the remaining lending capacity is severely restricted.6. Situation of the guarantee fund at 31 December 1999Outstanding lending and loan guarantee operations for non-member countries plus unpaid interest due totalled EUR 12 052 million at 31 December 1999.EUR million//  Situation at 31.12.991. Capital outstanding, borrowing and lending  //  1 5912. Capital outstanding, EIB  //  10 1373. Capital outstanding, payment defaults   //  1584. Default interest  //  375. Unpaid interest due [6]  //  129[6]  Unpaid interest due within the meaning of the Regulation establishing the Guarantee Fund.TOTAL  //  12 052The ratio between the Fund's resources and outstanding capital liabilities within the meaning of the Regulation establishing the Fund was 10.9%, which is higher than the target amount of 10%. The rules state that "at the end of a year ... the surplus shall be paid back to a special heading in the statement of revenue in the general budget of the European Communities". The surplus of EUR 107.9 million at the end of the 1999 financial year will be repaid to the budget in the first half of 2000.The Guarantee Fund could amount to around EUR 1 422 million at the end of 2000 assuming:- a transfer of EUR 176 million from the reserve in 2000;- no further defaults requiring activation of the Fund;- no late repayment of arrears by defaulting countries;- revenue of around EUR 41 million on investments from the Fund's assets in 2000.7. Relative solidity of the guarantee fundThe ratio between the amount in the Fund at 31 December 1999 (EUR 1 313 million) and the maximum annual risk for loans to non-member countries (defined as the total amount falling due) shown for 2000 in Table 3 (EUR 1 405 million) comes to 93%.&gt;REFERENCE TO A GRAPHIC&gt;Part Two Evaluation of potential risks: Economic and financial situation of the non-member countries benefiting from the most important loan operations1. IntroductionThe figures given in the previous parts provide information on the quantitative aspects of the risks borne by the general budget. However, these data should be weighted in accordance with aspects relating to the quality of the risk, which depend on the type of operation and the standing of the borrower. Recent events which may influence the portfolio country risk are analysed below.The country risk evaluation presented in this Part Two provides a set of country risk indicators, in the form of a full-page table per country (see Annexes), for all non-member countries that have been recipients of EC macro-financial assistance and which still have outstanding debts towards the EC. To complement this, textual analysis is provided for those countries where significant new information influencing the risk evaluation has become available since the previous report covering the first six months of 1999. Brief textual analysis is also provided for the countries which have still to repay loans outstanding in the context of the ECU 1250 million commercial credits made available to the then Soviet Union in 1991.The evaluation in this section does not deal with other regions than those mentioned, mainly because Community exposure elsewhere (notably through guarantees of EIB lending) represents only a small fraction of total exposure and is also well diversified among countries.2. Accession CountriesBulgariaThe economic slowdown in late 1998 continued during the first half of 1999 when GDP growth was close to zero due to decreasing exports and a steep fall in industrial output. The downward trend in industrial and retail sales continued throughout most of 1999. While an expected resumption of growth in the EU and the end of the Kosovo crisis are expected to stimulate Bulgarian growth in 2000 and 2001, there are not yet clear signs of a sustainable growth pattern. Public finances continue to be in a healthy shape, inflation is low, and the high level of foreign reserves is underpinning the credibility of the currency board.The trade balance has worsened significantly and the current account deficit in 1999 is projected to be above 6% of GDP. While the Kosovo crisis played a part in this, the restructuring of the manufacturing sector lead to lower industrial production and increased imports of investment goods. A number of large scale privatisation deals involving foreign investors and support from International Financial Institutions contributed to finance the deficit.Overall macro-economic stabilisation has been impressive, but there are still medium term threats to the Bulgarian economy. While privatisation of state enterprises has proceeded on schedule, undue emphasis on management-employee buy-outs slow down the much needed modernisation and restructuring. Moreover, the banking sector has been reluctant to finance domestic industries and foreign investors are still hesitant to engage massively. Restructuring of State owned enterprises and of the manufacturing sector is accompanied by increasing unemployment, while the burden of weak administration and lack of a transparent business environment continues to be a brake on economic development.The reform programme agreed with IMF remains on track, with only minor delays in meeting target dates. Increasing difficulties of meeting the structural performance criteria of the IMF programme must be expected during 2000, in particular as regard restructuring of public utilities, which are in a very bad economic shape. The Government's determination to pursue the reform programme is for this reason likely to be tested in the spring. A recent reshuffling of Government does, however, indicate the strong priority for EU-accession and economic reform.EstoniaAfter the sharp decline in economic activity experienced in Estonia in late 1998-early 1999, economic growth resumed in the third quarter of 1999. Short-term indicators have pointed towards a broad-based recovery in activity. Monetary conditions became more favourable: in a context of lower inflation, interest rates fell and credit growth picked up. The appreciation of the dollar against the Euro (and hence the local Estonian Kroon) provided another positive stimulus.After a sharp deterioration of the government's accounts in the first half of 1999, the growth of the fiscal deficit was checked in the second half. Nevertheless, the deficit is expected to reach 4,5% of GDP at the end of the year. For the year 2000, the government is committed to implement a tough fiscal policy, with the budget balanced at a lower nominal level of expenditures. Another priority is to tackle unemployment, which increased dramatically in late 1998-early 1999. Encouragingly, registered unemployment remained constant in the second half of 1999.The corollary of the fall in domestic demand was the rapid reduction of the trade and current account deficits. The reduction in imports of goods was particularly strong, while the decline in exports was more modest, notably because exports to the EU - the country's largest trade partner - continued to grow steadily. At the same time, the services sector (in particular transport and tourism) registered a much higher surplus. Overall, this led to a surplus of the current account in the third quarter of 1999, thereby allaying international investors' recurrent fears about the country's macroeconomic fragility. The financing of the current account deficit remained sound, allowing international reserves to grow steadily, while the government's external debt remained very small (about 5% of GDP on a gross basis; the total external debt of the country representing 57.5% of GDP). Estonia's sovereign rating was confirmed by Standard and Poors' in September 1999.Estonia is finalising the negotiations over a precautionary Stand-by arrangement with the International Monetary Fund, expected to be approved in early 2000. Improved market confidence led to much lower risk premium on Kroon-denominated assets and on the spread paid by Estonian borrowers on foreign exchange-denominated loans.LatviaIn the first half of 1999, GDP decreased by 2% compared with the same period of the previous year. The industrial output index is rising since May, and close to the levels which it reached in 1998 since September.  On the other hand, there was a very sizeable drop in transport services, related mainly to the transit of oil and oil products, in the third quarter of 1999.  Inflation in Latvia has been low throughout the year. The official unemployment rate fell to 9.1% at the end of November, after having peaked at 10.2% in April.As far as external trade is concerned, further growth of exports to the EU, in parallel with a contraction of exports to Russia, has taken place and can be expected to continue. Total exports in the first seven months contracted in comparison with the previous year, but imports fell even more.  The current account deficit amounted to 9.1% of GDP in the first half of 1999, which is lower than the 11.1% recorded over the two halves of 1998.In 1998, the general government deficit, excluding privatisation revenue, was 0.8% of GDP.  The fiscal situation in the first half of 1999 points to a worse outcome in 1999 due to the impact of slower economic growth on government revenue, as well as to higher pension payments and unemployment benefits and the government wage increases granted in late 1998.  In order to address the mounting fiscal imbalance, the Parliament approved in August a supplementary budget for the remainder of the year, which included spending cuts equivalent to 1.5% of GDP, as well as increases in excise tax rates on alcohol, fuel and tobacco.Following the difficulties of a number of banks as a result of the Russian crisis, the situation in the banking sector shows signs of a return to stability.  Interventions by the Bank of Latvia in the foreign exchange market in the second half of 1999 have led to a tightening of monetary conditions, and to a modest rise in interest rates.In December 1999, the IMF approved a 16-month stand-by arrangement (SBA) for Latvia, equivalent to SDR 33 million (about EUR 45 million) to support the governments economic program for 2000-2001.  The Latvian government does not intend to make drawings under the SBA and treats it as precautionary. The central government's external debt was USD 620 million at the end of November 1999, which is less than 1% of GDP and includes USD 225 million in eurobonds. At the end of March 2000, Latvia will have to repay about EUR 34 million of its foreign debt to various financial institutions.LithuaniaThe economic effects of the Russian crisis have reached the Lithuanian economy with some delay, as the government tried to dampen the negative external shock by supportive measures. Despite this counter-cyclical policy, output dynamics have been decreasing from the second half of 1998 onwards. The main reasons for this development have been the breakdown of Lithuania's major export markets in the NIS after the financial crisis in autumn 1998 and the output volatility of the country's only oil refinery depending on unstable supply from Russia and accounting for nearly one tenth of Lithuanian GDP. In addition, the pegg of the national currency to the US dollar resulted in a marked appreciation of the Litas vis-à-vis important European trading partners, impairing the country's competitiveness on European markets. As a result, GDP growth declined by about 3% in 1999. However, on the basis of stronger growth in the EU and the recovery of NIS markets, economic activity is expected to accelerate  in 2000.Consumer price inflation has been declining significantly. In addition to the appreciation of the litas, low prices for imported commodities and the surplus supply of agricultural goods on the domestic market contributed to the decrease in consumer price inflation from 2.4% in December 1998 to 0.3% in December 1999. Despite some inflationary effects of price liberation and increasing world prices for raw materials, inflation is seen to remain on a low level in the near future.As a result of declining growth and economic restructuring, unemployment rose throughout the year reaching a rate of 10% in December. The average rate rose to 8.4% for the whole year of 1999 compared to 6.4% in 1998. Since the labour shedding effect of restructuring continues the unemployment rate might rise further.Public finances deteriorated significantly when the effects of the Russian crisis reached the Lithuanian economy. Current revenues fell short of their target as the tax base eroded and expenditures rose in order to support affected companies. As a result, the general government financial deficit increased from close to 2% of GDP in 1997 to more than 5%  in 1998 and might have been even above this mark in 1999. In order to bring back public finances to sustainable levels, the parliament approved expenditure cuts and an "anti-crisis" programme, envisaging the postponement of the third and last tranche of the savings restitution, amounting to about 1.5% of GDP, the signing of an IMF stand-by agreement in order to avoid liquidity constraints and various structural reforms to improve the sustainability of public finances. Most of the measures are intended to be incorporated into the year 2000 budget, which currently is in preparation. The IMF stand-by agreement is  expected to be signed  in early 2000.External accounts worsened markedly in wake of the Russian crisis, when export markets eroded, while imports remained relatively strong due to the growth stabilising approach of the Lithuanian government and the ongoing import needs for modernising and restructuring of the economy. Only from mid-1999 onwards, imports started to decline stronger than exports helping to reduce the trade deficit. Foreign direct investment remained relatively unaffected by the economic slowdown and helped to finance the current account deficit of more than 10% of GDP. Although at present the financing of the current account deficit is no major problem, the actual level requires corrective measures in the medium term.RomaniaIn the second half of 1999, Romania continued to be gripped in the midst of a severe recession. In a context of widespread financing problems, macroeconomic imbalances, low capital inflows, rising unemployment, and timid restructuring of large loss-making companies, limited progress was made in consolidating macroeconomic stability and restoring market confidence.In the second half of 1999, economic activity continued to contract and GDP is estimated to have fallen by about 4%  in real terms for the year as a whole. On the expenditure side, investment registered a strong decline, reflecting weak aggregate demand, the impact of prolonged high interest rates, and the difficulties to raise outside financing. However, there has been a modest revival of exports and retail sales. The fiscal position remained fragile but the implementation of the budget proved better in the second half of the year. Nevertheless, the reliance on the domestic markets to finance the budget deficit continued to cast doubt on the sustainability of the fiscal position, given the short maturities and higher yields of internal debt.The fall in nominal and real interest rates that took place in the second half of 1999 should be an important element in consolidating the macroeconomic situation. The reduction in interest rates owes much to the actions taken to address the very serious problems of the public financial sector, the lower risk premium after Romania successfully repaid its external obligations in the first half, and the higher liquidity on the interbank market. However, the higher liquidity has run counter to the central bank's objective of controlling inflation. Indeed, consumer prices inflation accelerated from 32% at the beginning of the year to 55% at the end of the year.In fact, monetary authorities tried to pursue many objectives at the same time, including strengthening credibility of the national currency, increasing the level of foreign exchange reserves, controlling liquidity, reducing inflation and ensuring some real depreciation of the currency to support exports. They failed to achieve all of them. In this context, attracting higher capital inflows and making substantial progress on structural reforms remain key objectives, as they would reduce the policy dilemmas of the central bank and hence unburden monetary policy.The second half of 1999 was characterised by the reduction in the trade and current account deficits. For 1999 as a whole, the current account deficit is expected to be reduced by half to about USD 1.5 billion. Indeed, the fall in domestic demand and difficulties to raise trade financing led to a sharp fall of imports, while stronger growth in the EU and the impact of the significant real depreciation of the currency that took place in late 1998-early 1999 sustained the level of exports. However, the overall balance of payments remained weak. Indeed, Romania's low international credibility and a not very friendly and hospitable environment for investment held back private foreign capital inflows. Romania was not able to place Euro- and Samourai bonds due to the very high risk premium requested by markets. The increase of official foreign exchange reserves from the very low level reached at the end of the first half was accounted for almost exclusively by purchase by the National Bank of Romania on the domestic market.In the face of serious balance of payments problems, the government reached agreement with the International Financial Institutions on new structural adjustment loans. On 10 June 1999, the World Bank approved credits worth USD 325 million (including a new USD 300 million Private Sector Adjustment Loan (PSAL) and on 5 August, the IMF executive Board approved a SDR 400 million (USD 550 million) new Stand-by arrangement. In August, the World Bank released USD 150 million under the PSAL, while the IMF made a first, reduced, payment of USD 73 million. The release of the second tranche (about USD 200 million), scheduled in October, was repeatedly delayed and could not be made in 1999. The World Bank has yet been unable to release the last tranche, worth USD 150 million, of its Agricultural Structural Adjustment Loan. This loan was originally approved in 1997, and extended at the end of 1998.3. Western BalkansBosnia and HerzegovinaDuring the period 1996-98, Bosnia and Herzegovina (BiH) has managed to sustain an average growth rate of about 35%. These high growth rates have been achieved from very low initial GDP levels and in the context of the externally financed USD 5.1 billion Economic Recovery and Reconstruction Programme (1996-1999) for BiH supported by the international donor community. Despite these high rates of growth, inflation has come down rapidly to country-wide single digit levels, supported by a strict adherence to rules of the currency board arrangement (CBA) and prudent fiscal policies implemented as part of a country-wide macro economic programme supported by the IMF under a SBA. The exchange rate of the Konvertible Marka (KM) remains pegged on a 1:1 basis against the Deutsche Mark (Euro) in the context of the CBA. For 1999, real GDP growth is projected to decelerate to 12% compared to a pre-crisis projection of 16%, largely as a result of the impact of the Kosovo crisis on trade and domestic investment earlier in the year. Unemployment remains high in both Entities, hovering around a level of 40%. In 1999, both Entities were forced to rebalance their budgets and compress expenditures by some 30%, notably as a result of the adverse effects of the Kosovo crisis in the first half of 1999. While the Republika Srpska (RS) draft budget for 2000 appears to be balanced, the Federation has presented a draft budget that exceeds the recommended ceilings on expenditure prescribed by the IMF.The current account continues to show a very large deficit (of about 22% of GDP in 1999), mainly financed by donor assistance and reflecting high levels of reconstruction-related imports. Gross official foreign exchange reserves stand at about 3 months of imports or around 600 million KM, having recorded a significant increase during the last half of 1999, reflecting the increased acceptance of the KM in both Entities. The foreign debt of BiH remains at high levels (about 70% of GDP at end-1998), partly reflecting a substantial debt burden inherited from the former Yugoslavia. Debt service as a percentage of exports of goods and services, however, is low relative to the debt-over-GDP ratio, reflecting the concessional nature of much of the debt and favourable debt rescheduling agreements with the London Club and Paris Club. These factors also explain why debt and debt service ratios are projected to continue declining in the coming years despite substantial reconstruction-related foreign borrowing. In BiH, the Entities are responsible (based on a formula of 61:39 for the Federation and the RS, respectively) for providing the State with the necessary resources enabling it to service the foreign debt.In May 1998, the IMF approved a SBA (USD 81 million). In June 1999, the IMF decided to augment its assistance by USD 23 million as a result of the adverse impact of the Kosovo crisis. The World Bank runs two policy based aid programmes in BiH in support of public finance reform and enterprise and banking sector privatisation. These are financially supported by two IDA credits amounting to a total of USD 134 million on a concessional basis, including an augmentation in the amount of USD 28 million to take into account the adverse impact of the Kosovo crisis. As far as country risk indicators for BiH are concerned, there is no specific information available as institutions do not provide with any ratings for the country. The general risk perception of undertaking investment in the country remains high.Former Yugoslav Republic of MacedoniaEconomic activity in the former Yugoslav Republic of Macedonia contracted sharply in early 1999 largely as a consequence of the Kosovo conflict. The crisis in Kosovo affected the former Yugoslav Republic of Macedonia through a disruption of trade, a sharp reduction in FDI and a massive influx of refugees. Since the end of the conflict, however, the situation has reversed and now the reconstruction of Kosovo is proving to be an important factor of economic growth. The country's exports to Kosovo are increasing strongly and the presence of international relief personnel and military forces in the region gives rise to a marked increase in domestic demand. Accordingly, earlier forecasts of a significant decline in GDP in 1999 are not likely to have materialised. Rather, real GDP growth is expected to have grown by 2.7% in 1999.Against the background of a considerable slowdown of economic reforms over the past two years, the problems of the former Yugoslav Republic of Macedonia with respect to competitiveness continue. This has been reflected in the high current account deficit which stood at some USD 290 million in 1998 (8% of GDP). Although the international relief efforts in Kosovo supported exports and contributed to a sharp decline in the current account deficit to USD 123 million in 1999, this situation may only be temporary. At the end of 1999, the foreign debt stock increased to EUR 1482 million (44% of GDP, up from 41% in 1998) and the debt service rose sharply from EUR 127 million in 1998 to EUR 162 million in 1999 (12% of exports of goods and services).In June 1998, the IMF approved the request for the second annual ESAF arrangement in support of a revised policy framework (April 1998-April 2000). However, against the background of the massive impact of the Kosovo crisis, and in the light of the failure to agree on an appropriate medium-term structural reform agenda which de facto implied the suspension of the programme in 1999, it is now envisaged to replace the programme which expires in April 2000 by an economic programme which could be supported by a SBA. Moreover, such a programme could be supported by the World Bank through a second Financial and Enterprise Structural Adjustment Loan (FESAL) to back structural reforms. Negotiations with the IFI's are currently ongoing with a view to agreeing on such a programme.4. Newly Independent StatesArmeniaGDP rose by 7.2% in 1998 and by 6.1% in the first nine months of 1999. However, growth depended substantially on foreign financing, in particular from the World Bank and IMF, allowing Armenia to run large current account and budget deficits. Thanks to the Government's return to tighter fiscal and monetary policies, inflation was not expected to exceed 2% for 1999 as a whole. In the first seven months of 1999, the state budget showed a deficit equivalent to 4.5% of GDP, compared with 1.4% in the corresponding period of 1998 and 4.8% for 1998 as a whole. Accumulated tax arrears grew alarmingly. However, as a result of a package of austerity measures adopted in August 1999, a steady improvement in tax collection was registered and budget revenue targets for 1999 were expected to be met.As a result of the commercial blockade imposed on the country, the financial crisis in Russia, and the relative strength of the Dram, Armenia's current account deficit in 1998 was equivalent to 27.3% of GDP. Imports were more than triple the value of exports. The trade deficit, however, shrank by 9.2% to 28% of GDP in January-June 1999, as a result of a steeper drop in imports relative to exports. Inflows from expatriate Armenians, International Financial Institutions and foreign countries (in particular the US) as well as substantial amounts of foreign direct investment have prevented these imbalances from destabilising Armenia's economy. These deficits are, however, clearly unsustainable in the long run. The country's stock of external debt is growing and expected to be around 50% of GDP at the end of 2000. Gross foreign exchange reserves, bolstered by privatisation receipts, are still comfortable with an imports coverage ratio of around 3.7 months. After a slight depreciation in the wake of the Russian crisis, the currency has appreciated somewhat in recent months to a level of around Dram 515 per USD in December 1999.On 8 October 1999, the IMF completed the midterm review under the third annual arrangement with Armenia. It expressed concern, however, about the policy setbacks and a loss of momentum in the implementation of the structural reforms, in particular in implementing the financial rehabilitation plan for the energy sector. It welcomed corrective actions by new Government, in particular the authorities' decision to undertake strong corrective fiscal measures and efforts to restore the momentum of privatisation.BelarusEconomic and political developments in Belarus continue to give rise to serious concerns. Indeed, there is an imminent default risk owing to the government's continuous problems to generate sufficient hard currency to service its debt. Although the stock of external debt is estimated at a mere 25% of GDP, the cash-strapped government already had to restructure loans under state guarantee and continued to accumulate arrears on electricity and gas payments with Russia and Lithuania.In 1999, falling demand combined with a severe terms of trade shock resulted in a substantial slowdown in economic activity. In the absence of appropriate policy measures, unsustainable structural and monetary imbalances have emerged.Only when the country is able to re-establish relations with the IMF and receive support from the multilateral donors, it might be able to overcome the growing difficulties and to regain sufficient international credibility to find a permanent solution to the precarious financial situation.GeorgiaGeorgia's GDP rose by just 2.9% in 1998, far below projections of 11%, and slowed further to 1.7% in the first half of 1999. A growth of 2.2% is expected for 1999 as a whole. The slower growth largely reflects a collapse in exports to Russia, Ukraine and Moldova in the wake of the Russian rouble's devaluation. The budget crisis' impact on domestic demand has compounded this situation. The rapid depreciation of the Lari associated with the National Bank's decision to cease foreign exchange interventions induced an inflation increase from December 1998. However, thanks to a relatively stringent monetary policy, annual inflation is expected to reach a maximum of 11% in 1999. The budget deficit (on a commitment basis) represented 4.3% of GDP in 1998. It was likely to remain high, even to grow up to 4.9% of GDP in 1999 due to the economic growth deceleration, weak tax collection and corruption, financial problems of many large enterprises and high cost of debt servicing.In 1998, largely as a result of the collapse of exports to Russia during the final quarter, the current account deficit (excluding official transfers) surged to a level of 11.6% of GDP. It will however be smaller in 1999, owing to subdued domestic demand for imports. Georgia benefited from substantial amounts of foreign direct investment in 1998 (above USD 200 million). FDI was, however, expected to decrease in 1999. The external deficits have been covered mainly with foreign loans. Consequently, but also as a result of the Lari depreciation of December 1998, Georgia's foreign debt, which represented 33% of GDP in late 1998, was on the rise and was expected to represent 42% of GDP at the end of 1999. Gross foreign exchange reserves were expected to represent an import coverage ratio of about 1.7 months. The exchange rate has now stabilised at a level of Laris 2 per USD, but a persistent inflation could weaken the currency in the coming months.In July 1999, the IMF finally concluded favourably the mid-term review under the third annual ESAF arrangement with Georgia, although revenue collection rates were still disappointing in this country. The country was expected to benefit from a new three year ESAF arrangement with the IMF before the end of the year. However, the IMF did not consider the draft budget for 2000 as fully satisfactory. Moreover, it remained concerned by the interrelated problems of corruption and insufficient tax revenue, as well as by the relatively low priority given so far to the payment of public-sector salaries and pensions.MoldovaAfter having recorded positive real growth for the first time since independence in 1997, Moldova saw economic growth turn again negative in 1998, dropping by 8.6%, largely because of the severe impact of the crisis in Russia on exports. Both industrial and agricultural production fell by about 11% in real terms. On the structural side, although some progress was made in mid-year and again in the final quarter, delays in energy reforms and fiscal restructuring in particular, undermined progress in reducing macro-economic imbalances.Strong financial measures were undertaken in late-1998/early-1999 which focused on a sharp tightening of fiscal policy, in the context of the IMF programme. Nevertheless, the real and financial shock from the economic crisis in Russia and the region have continued to weigh heavily on the Moldavian economy as evidenced by a collapse of about 50% in exports in 1999. As a result, the economy reportedly contracted in 1999 by another 5%. Inflation, which had declined more quickly than expected early in the year, accelerated in the second half of 1999 to about 45% in the year to December, in part due to the sharp depreciation of the leu. The external current account deficit is reported to have contracted sharply to about 1% of GDP from around 20% in 1998, owing to the significant decline in domestic demand. The political turmoil in the final quarter of 1999, and the subsequent suspension of the IMF programme, have been detrimental to the public finances. Consequently, the 1999-budget deficit widened further to about 5% of GDP.The new government, in place since 22 December 1999, seems prepared to relaunch economic reforms necessary for reopening access to urgently needed external credits. The IMF already expressed its satisfaction with the proposed measures and is expected to resume negotiations about a new programme in early February 2000. The budget for 2000 and further privatizations are considered as vitally important for receiving new IFI-financing.TajikistanNotwithstanding two external shocks (continued fall in world commodity prices - in particular cotton and aluminium - and financial crisis in Russia), output expanded remarkably by about 5.3% in 1998, although from a very low base. In 1999 GDP growth slowed down to around 3.5%. As a result of the tightening of economic policies, growth is however to pick up next year. In early 1999, as the Government failed to collect satisfactory revenue levels, the budget deficit reached 4% of GDP instead of the forecast 3%. However, the budget was roughly balanced in September and October. With regard to inflation, July and August 1999 still saw very high rates (around 25%), but prices decreased with 1.4% in September and with 2% in October. This was the result of the dramatic tightening of policies (both monetary and fiscal policy) which took place early September.In 1998, the current account deficit (excluding transfers) expanded from 9.2% to 15.2% of GDP, as export revenues declined and remittances from Russia diminished. It is expected, however, to fall back to around 8% of GDP in 1999. International reserves, which covered one month of imports at end-September 1999, were expected to increase to 1.4 months of imports towards the end of the year, a similar level to the one recorded at the end of 1998. At end-1999, the external debt of Tajikistan was expected to be equivalent to USD 1 029 million or 130% of GDP. After a sharp depreciation of the currency against the USD (by 33% from August 1998 to mid-March 1999), the exchange rate has been stable since end-August 1999.In July 1999, based on the strength of the country's economic programme and on Tajik authorities' firm commitment to pursue adjustment and reform efforts, the IMF Board adopted a second annual ESAF arrangement with Tajikistan. In November 1999, the overall Fund assessment was that the Government was serious about changing its economic policies, as witnessed from the tightening of fiscal and monetary conditions in September. Subject to prior actions on a number of key financial variables by end-1999, the IMF Board was expected to complete the first and second reviews of the second annual arrangement under the Poverty Reduction and Growth Facility.UkraineReal GDP is estimated to have fallen by about 0.5% in 1999, although the rate of output decline seems to have slowed in the second half of the year. Reflecting the easing of monetary and fiscal policy and the sharp depreciation of the exchange rate around the Presidential elections of October-November 1999, inflation accelerated again in the last four months of the year, with the CPI jumping by 4.1% in December. Average CPI inflation in 1999 was 19.2 percent. Despite the slippages of the second half of the year, the general government deficit is estimated to have been maintained near its 1998 level (about 2.7% of GDP). The new government formed in early January 2000 has submitted to the Parliament a revised 2000 budget aiming at a zero deficit at the central government level. Parliament approved this budget on 17 February 2000. Progress towards structural reform has been mixed. There has been some progress in areas such as privatisation, deregulation, and public administration reform. However, reforms in other areas, especially the agriculture and energy sectors, have been disappointing. While banking supervision has been strengthened, recent diagnostic studies suggest that five of the largest banks are insolvent and some prudential regulations are not being fully enforced.The current account deficit is estimated to have declined in 1999 to about 1% of GDP (from about 3% in 1998) reflecting the negative effect of shrinking output on imports and some recovery of exports from their depressed, Russian-crisis related, 1998 levels. But the balance of payments position remains very vulnerable. The government must pay about USD 3 billion to foreign creditors in 2000, including almost USD 800 million in the first quarter. Usable official foreign exchange reserves stood at only about USD 1.1 billion at end-1999, or the equivalent of about 3 months of imports. The government is expected to announce in early 2000 a deal to restructure some USD 2 billion of foreign debt, mostly bond debt owed to the private sector but also part of Ukraine's debt to the Russian gas company Gazprom. These debts would be swapped into a single 7-year to 10-year maturity euro-denominated bond. It should be noted that, although Ukraine is likely to have a debt service problem in 2000-2001, its foreign debt is not high by international standards, amounting to about 40% of GDP at end-1999.In September 1998, the IMF approved an EFF for Ukraine in the amount of USD 2.2 billion, which was later augmented to USD 2.6 billion. The EFF ran off-track a couple of months after its approval because of fiscal and structural slippages but resumed under a revised economic programme in the spring of 1999. The easing of macroeconomic policies, the failure to implement a number of structural reforms and the impasse created by the Presidential election, however, led to a second interruption of purchases under the EFF in the autumn of 1999. Following the appointment of Mr. Yuschenko as Prime Minister, an IMF mission has been in Ukraine negotiating a new economic programme to be supported by a resumption of purchases under the EFF. Reflecting what it perceives as an increased risk of default, Moody's downgraded in early January 2000 Ukraine's long-term foreign currency rating from B3 to Caa1 (a default grade rating).5. Other Non-Member CountriesAlgeriaRecent developments both on the political and economic side are likely to have a positive impact on Algeria's country risk. The government's efforts to restore peace and civil concord, and the broad popular support for this policy should contribute to ameliorate confidence in the country.Economic developments in Algeria in 1998 and 1999 have been marked by the large swing in oil prices. Their fall by almost one-third in 1998 to a level below USD 12 per barrel boosted volume exports. Together with a recovery in agricultural output and a turnaround in industrial activity, growth of GDP accelerated to 4% (from just over 1% in 1997) somewhat less, however, than projected. With oil prices strongly rebounding in 1999 to over USD 25 per barrel, little further strengthening of GDP growth is expected (+4.5%). Inflation has been brought under control over the last years, and is currently running at 6% annual rate, despite a nominal depreciation of the Dinar of about 15% since September 1998.Algeria's current external account swung from a surplus of over 7% of GDP (1997) to a deficit of almost 2% in 1998. Given the dominance of oil in overall exports (with hydrocarbons accounting for 95% of total external revenues), the situation in 1999 is expected to have been better, with a surplus projected at 1.5% of GDP.The rise in the current account deficit until mid-1999 has been accompanied by a weakening in the capital account (excluding exceptional financing). This is due to slow expansion of medium- and long-term credit, in the context of the expected rise in debt service cost and increased recourse to cash financing of imports. With the rebound in oil prices, total foreign debt is expected to have fallen from 66% of GDP at the end of 1998 to around 60% at the end of 1999. Nevertheless, the debt service burden remains heavy: the debt service ratio, which temporarily fell below 30% in 1996/97, as a consequence of a debt rescheduling agreement with the Paris Club, rose again to around 45% in 1999.The adverse impact of low oil prices on foreign exchange reserves - which fell from USD 6,8 to USD 5,3 billion at the end of 1999 - has been cushioned by mobilisation of balance of payments assistance from the Arab Currency Fund (USD 80 million) and a USD 300 million CCFF from the IMF last May. The most recent EFF IMF-supported programme expired in May 1998.List of abbreviationsCBA  //  Currency Board ArrangementCCFF  //  Compensatory and Contingency Financing FacilityDM  //  Deutsche MarkEC  //  European CommunityEFF  //  Extended Fund FacilityEIB  //  European Investment BankESAF  //  Enhanced Structural Adjustment FacilityEU  //  European UnionEUR  //  EuroFESAL   //  Financial and Enterprise Structural Adjustment LoanFDI  //  Foreign Direct InvestmentsFYROM  //  Former Yugoslav Republic of MacedoniaGATT  //  General Agreement on Tariffs and TradeGDP  //  Gross Domestic ProductIFIs  //  International Financial InstitutionsIMF  //  International Monetary FundSAF  //  Structural Adjustment FacilitySBA  //  Stand-By ArrangementUSD  //  Dollar of the United States of AmericaVAT  //  Value Added TaxWTO  //  World Trade OrganisationAnnex1. Explanatory notes on the situation of risks covered by the community budget1.1. Tables 1 to 3The purpose of Tables 1 to 3 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 Community 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 budget. In the case of Table 3, in particular, it is not certain that all the operations described will actually be disbursed.1.1.1. Authorised ceiling (Table 1)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 to 75% of the loans signed in the Mediterranean countries;* limitation of the guarantee given to the EIB to 70% of the loans signed as part of lending operations with certain non-member countries authorised by the Council Decision of 14 April 1997 and a sharing of risk between the Community and the EIB as the budget guarantee covers only political risks in some cases;* limitation of the guarantee given to the EIB to 65% of the loans signed as part of lending operations with certain non-member countries authorised by the Council Decision of 22 December 1999 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, except in the case of balance of payments support (Member States), are the maximum amount of loans granted and not outstanding amounts authorised;* the amounts authorised are not necessarily taken up in full.1.1.2. Capital outstanding ( Table 1)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 nor the proportion of disbursed loans which have already been repaid. It may be described as the amount of loans which exist on a given date.1.1.3. Annual risk (Tables 2 and 3)Estimated amount of principal and interest due each financial year.This amount is calculated for:a) disbursements alone (Table 2)in which case the capital to be repaid corresponds to the amount outstanding;b) disbursements, decisions still awaiting disbursement and Commission proposals still awaiting decisions (Table 3)in which case the capital to be repaid corresponds to the ceiling on loans authorised plus, where applicable, the amounts in respect of operations proposed by the Commission and not yet decided.1.2. Loan operations covered by a budget guarantee&gt;REFERENCE TO A GRAPHIC&gt;&gt;REFERENCE TO A GRAPHIC&gt;&gt;REFERENCE TO A GRAPHIC&gt;&gt;REFERENCE TO A GRAPHIC&gt;1.3. Expected signature and disbursement of EIB loansThe EIB has supplied the figures used for calculation of the assumptions made for drawing up Table 3 (EIB loans to non-member countries from its own resources).Expected signaturesAt 31 December 1999 a total of EUR 613 million was still to be signed:Mediterranean: former mandates (4th protocol with Syria)  //   EUR 115 millionMediterranean countries   //  EUR 0 millionCentral and eastern Europe (1)  //  EUR 152 millionAsia and Latin America (1)  //  EUR 136 millionSouth Africa (1)  //  EUR 90 millionFYROM  //  EUR 20 millionBosnia  //  EUR 100 million(1) The amount still to be signed for central and eastern Europe, Asia and Latin America, and South Africa under the Decision of 14 April 1997The foreseeable timetable for loan signatures under the new mandate of EIB loans (2000-07) adopted by the Council on 22 December 1999 is shown in the financial statement attached to the Commission proposal.Disbursement forecastsAs regards disbursement of the loans still awaiting signature, it is assumed that nothing will be paid in the year of signature, 10% in the second year, 25% a year between the third and fifth years and 15% in the sixth year.At 31 December 1999 EUR 6 579 million still had to be disbursed against loans signed at that date. The total breaks down as follows: [7][7]  Based on a working assumption that 25% of the loan will be disbursed every year for four years and that the average term will be fifteen years with a three-year period of grace.Mediterranean countries   //  EUR 2 353 millionCentral and eastern Europe   //  EUR 3 254 millionAsia and Latin America  //  EUR 674 millionSouth Africa   //  EUR 206 millionFYROM  //  EUR 92 millionIt is assumed that the rate of disbursement for the new mandate (2000-07) will be the same as that set out above.1.4. Payment of the budget guarantee1.4.1. Borrowing/lending operationsIn this type of operation, the Community borrows on the financial market and on-lends the proceeds (at the same rate and for the same term) to Member States (balance of payments), non-member countries (medium-term financial assistance) or firms (NCI, 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 No 1552/89 of 29 May 1989 implementing Decision 88/376/EEC, Euratom 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 extends to three months after the due date, the Commission draws on the Guarantee 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; any margin available in the guarantee reserve is drawn on first. This method is used when there are insufficient appropriations in the Guarantee 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 partiesThe loan guarantee is in respect of loans granted by a financial institution such as the European Investment Bank (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 defaulter in accordance with the contract of guarantee. The guarantee 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 demand the payments due after the guarantee has been activated.Since the entry into force of the Regulation establishing a Guarantee Fund for external action, 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 Guarantee 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.2. Methodological note on the analysis of the Community's estimated lending capacity in respect of non-member countries over the period 1997-99 under the Guarantee Fund mechanism (table 4)2.1. Reserve for loan guarantees to non-member countriesAs agreed at the Edinburgh European Council, the Interinstitutional Agreement of 29 October 1993 on budgetary discipline and improvement of the budgetary procedure provided for the entry of a reserve for loan guarantees to non-member countries as a provision in the general budget of the European Communities. This reserve is intended to cover the requirements of the Guarantee Fund and, where necessary, activated guarantees exceeding the amount available in the Fund, so that these amounts may be charged to the budget.The amount of the guarantee reserve is the same as in the financial perspective for 2000-2006, viz. EUR 200 million at 1999 prices. The amount in the reserve comes to EUR 203 million in 2000.The conditions for the entry, use and financing of the guarantee reserve are laid down in the following decisions:* Council Decision 94/729/EC of 31 October 1994 on budgetary discipline.* Council Regulation (ECSC, EC, Euratom) No 2730/94 of 31 October 1994 amending the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities.* Council Decision 94/728/EC of 31 October 1994 on the system of the Communities' own resources.2.2. Bases for the calculation of the provisioning of the Guarantee FundThe bases for the provisioning of the Fund are calculated by applying the appropriate rate of guarantee (65%, 70%, 75% or 100%):- to the loan guarantees authorised by the Council and to the loan guarantees proposed or being prepared by the Commission on the basis of the estimates of loan signatures contained in the financial statements (EIB and Euratom loans);- to the loans (for financial assistance) authorised by the Council and to the loans proposed or being prepared by the Commission.The annex to Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions, which relates to the arrangements for payments into the Guarantee Fund, states that, in the case of borrowing/lending operations or guarantees to financial bodies under a framework facility spread over a number of years and with a microeconomic and structural purpose, payments into the Fund will be made in annual tranches calculated on the basis of the annual amounts indicated in the financial statement attached to the Commission proposal, adapted where appropriate in the light of the Council decision.For other Community borrowing/lending operations, such as loans for the balance of payments of third countries, whether made in one or more than one tranche, payments into the Fund are calculated on the basis of the total amount for the operation decided on by the Council.The annex to the Regulation establishing the Guarantee Fund states that, as from the second year (in the case of operations spread over a number of years), the amounts to be paid into the Fund will be corrected by the difference recorded on 31 December of the previous year between the estimates that were taken as a basis for the previous payment and the actual figure for the loans signed during that year. Any difference relating to the previous year will give rise to a payment in the following year.The annex states that, when it starts a payment procedure, the Commission will check the situation with regard to the performance of the operations which were the subject of previous payments and, where the commitment deadlines originally laid down have not been met, will propose that this will be taken into account in calculating the first payment to be made at the start of the following financial year for operations already under way.In the second half of 1999, the budgetary authority accordingly adopted transfer 67/99 so that payments could be made into the Guarantee Fund in respect of macro-financial assistance for non-member countries (Albania, Bosnia, Bulgaria, Romania, FYROM) and in order to pay the annual tranches provided for in the financial statements for EIB loans for reconstruction projects in the areas of Turkey hit by the earthquake.2.3. Basis for the provisioning of the Fund in the event of a part guaranteeFor EIB loans covered by an aggregate 75% guarantee, the Fund is provisioned on the basis of 75% of the total amount of operations authorised.The guarantee on the EIB loans authorised by the Council on 14 April 1997, 19 May 1998 and 14 December 1998 is limited to 70% of the total amount of credits opened. The basis for provisioning is 70% of the annual forecast of signatures.The guarantee on the EIB loans authorised by the Council on 29 November 1999 is limited to 65% of the total amount of credits opened. The basis for provisioning is 65% of the annual forecast of signatures.2.4. Provisioning of the Guarantee FundThe amounts paid into the Fund are obtained by applying the rate of provisioning (14%) to the calculation base set out above.Pursuant to Articles 2 and 4 of the Regulation establishing the Guarantee Fund, the Fund is endowed by payments from the general budget equivalent to 14% of the capital value of the operations until it reaches the target amount. As the target amount was reached at 31 December 1997, the Commission, in accordance with the Regulation, submitted proposals to review the rate of provisioning. These proposals appear in the comprehensive report on the functioning of the Fund which the Commission drew up in accordance with Article 3 of the Regulation (COM(1998) 168 final of 18 March 1998). Regulation No 2728/94 establishing a Guarantee Fund for external action has been amended by Council Regulation (EC, Euratom) No 1149/1999 of 25 May 1999 under which the provisioning rate for the Fund and the target amount is fixed at 9% from 1 January 2000.2.5. Margin remaining in the guarantee reserveThe margin remaining in the guarantee reserve is equivalent to the difference between the reserve and the heading for the provisioning of the Guarantee Fund.2.6. Residual lending capacityThe residual lending capacity is the loan equivalent of the margin left in the reserve, allowing for the guarantee rates in force.3. Tables: country-risk indicators&gt;REFERENCE TO A GRAPHIC&gt;