Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 30 June 2004 SEC(2004) 1629
Date: 2005-01-12
Institutions: European Commission
Subjects: Argentina, Brazil, Bulgaria, CIS countries, Community loan, Jordan, Romania, Türkiye, Western Balkans, budgetary reserve (EU), financial aid, general budget (EU), investment protection, short-term monetary support

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.01.2005 
COM(2004) 836 final 

. 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
situation at 30 June 2004 

SEC(2004) 1629 

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TABLE OF CONTENTS 

Part One: Events since the Report at 31 December 2003, the risk situation and activation 

of Budget Guarantees................................................................................................... 3 

1. 

2. 

3. 

3.1 

3.2 

3.3 

4. 

4.1 

4.2 

5. 

6. 

7. 

Introduction: types of operation ................................................................................... 3 

Events since the report at 31 December 2003.............................................................. 3 

Risk situation................................................................................................................ 4 

Capital outstanding at 30 June 2004 ............................................................................ 4 

Maximum annual risk borne by the Union budget: operations disbursed 
at 30 June 2004 (see Table A2 in Annex) .................................................................... 5 

Maximum theoretical annual risk borne by the Union budget: operations 
disbursed and decided at 30 June 2004 (see Table A3 in Annex) ............................... 5 

Activation of budget guarantees................................................................................... 5 

Payments from cash resources ..................................................................................... 5 

Activation of the Guarantee Fund ................................................................................ 5 

Analysis of the Community's theoretical lending and guarantee capacity 
in respect of non-member States .................................................................................. 6 

Situation of the Guarantee Fund at 30 June 2004 ........................................................ 7 

Relative solidity ........................................................................................................... 8 

Part Two: Evaluation of potential risks: Economic and financial situation of 

the non-member countries benefiting from the most important loan operations ......... 9 

1. 

2. 

3. 

4. 

5. 

Introduction.................................................................................................................. 9 

Candidate countries...................................................................................................... 9 

Western Balkans .......................................................................................................... 9 

New Independent States............................................................................................. 10 

Other non-member countries...................................................................................... 10 

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Part One: 
Events since the Report at 31 December 2003, the risk situation 
and activation of Budget Guarantees1 

1. 

INTRODUCTION: TYPES OF OPERATION 

The  risks  covered  by  the  Union  budget  derive  from  a  variety  of  lending  and 
guarantee operations which can be divided into two categories: loans granted by the 
EC  with  macroeconomic  objectives  (balance-of-payments  loans  to  Member  States 
and  macro-financial  assistance  loans  to  non-member  States)  and  loans  with 
microeconomic  objectives  (Euratom  and  EC-NCI2  loans  in  Member  States  and 
Euratom and European Investment Bank loans outside the Community3). 

2. 

EVENTS SINCE THE REPORT AT 31 DECEMBER 2003 

Regarding  macro-financial  assistance  provided  to  third  countries,  Council  decision 
(2004/580/EC)  of  29  April  2004  granted  exceptional  macro-financial  assistance  to 
Albania for a total amount of EUR 25 million, of which EUR 9 million in loans. A 
loan  disbursement  of  EUR  10  million  was  carried  out  on  the  basis  of  the  existing 
decision in favour of Bosnia and Herzegovina. 

Regarding Euratom, a new Commission decision (C(2004)891/2) was adopted on 30 
March 2004 in relation with the Cernavodă plant in Romania. A loan disbursement 
was carried out on the basis of an existing decision in favour of Bulgaria (Kozloduy, 
EUR 35 million). 

A  new  Commission  decision  amending  decision  (C(2000)3812)  of  13  December 
2000 will be adopted in the second half of 20044 in order to reduce the loan amount 
decided in favour of Ukraine for K2R4 plant. 

With  a  view  to  the  accession  of  ten  new  Member  States  on  1 May 2004,  the 
Commission proposed an amendment to Council Regulation No 2728/94 establishing 
a Guarantee Fund for external actions, as amended. The amendment would withdraw 
the loans to the new Member States from the Guarantee Fund (while maintaining the 
Community  guarantee  coverage  for  those  loans)  as  these  countries  are  no  longer 
“third  countries”.  The  amendment  has  not  yet  been  adopted  by  the  Council. 
Therefore,  in  the  remainder  of  this  report,  unless  otherwise  stated,  all  figures  are 
calculated  including  the  new  Member  States  that  acceded  in  May 2004.  Where 

1 

2 

3 
4 

Please note that the annex contains a Commission Staff Working Paper with a set of detailed tables and 
explicatory notes to this report. 
New  Community  Instrument,  not  active  since  1995.  The  last  loan  will  be  fully  amortized  by 
17.12.2004. 
The details concerning the EIB Mandates are displayed in Table A1 of the annex. 
C(2004)2817/3 of 20.7.2004 (EUR equivalent of USD 83 000 000). 

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stated,  key  figures  are  reported  excluding  these  countries  as  it  is  expected  that  the 
amendment will be adopted by the Council at the end of 2004 or early in 2005. The 
amount  that  would  be  freed  from  the  Guarantee  Fund  and  transferred  back  to  the 
Union budget if the amendment is adopted is EUR 338 831 402. 

to 

According 
the  Commission  Communication  on  Financial  Perspectives 
2007 - 20135, the amount of the Reserve will theoretically not be limited in the future 
as the funding of the Guarantee Fund will be carried out through a budget line under 
Heading 4 (External Relations) and not, as at present, through a dedicated Reserve. 

3. 

RISK SITUATION  

The following risk analysis follows the established measures of capital outstanding, 
maximum annual risk and maximum theoretical annual risk borne by the Community 
budget  (methodology  explained  in  the  Commission  Staff  Working  Paper).  Detailed 
figures can be found in Annex Tables A1, A2 and A3 respectively. 

3.1. 

Capital outstanding at 30 June 2004 

The total risk at 30 June 2004 came to EUR 15 519 million, as against EUR 15 062 
million at 31 December 2003. 

The following table shows the operations which have had an effect on the amount of 
capital outstanding since the last report. 

Table 1: Capital outstanding at 30 June 2004*

EUR million (rounded)

Amount outstanding at 31 December 2003
Loan repayments

Loans disbursed

Euratom
NCI
macro-Financial assistance
EIB

Euratom
NCI
macro-Financial assistance
EIB

Exchange rate differences between EUR and other currencies
Amount outstanding at 30 June 2004

15 062

- 7
- 661

 35

 10
1 217
- 138
15 519

* all guaranteed loans (Member States and non-member States), excluding unpaid interests due 
and payments defaults.

The  capital  outstanding  in  respect  of  operations  in  the  Member  States  was  EUR 
5 431 million at 30 June 2004, compared with EUR 24 million at 31 December 2003. 

5 

COM(2004) 487. 

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The capital outstanding from non-member States at 30 June 2004 was EUR 10 088 
million, compared with EUR 15 037 million at 31 December 2003. 

The major changes in these figures are due to the transfer of accession countries from 
the “third countries” section to the “Member States” section as of 1 May 2004 (See 
Section 2 “Events since the report at 31 December 2003”). 

3.2 

Maximum  annual  risk  borne  by  the  Union  budget:  operations  disbursed  at 
30 June 2004 (see Table A2 in Annex) 

– 

– 

– 

For 2004 the total risk amounts to EUR 1 088 million. 

The risk in respect of the Member States comes to EUR 325 million. 

The risk in respect of non-member States comes to EUR 763 million. 

3.3 

Maximum  theoretical  annual  risk  borne  by  the  Union  budget:  operations 
disbursed and decided at 30 June 2004 (see Table A3 in Annex) 

– 

– 

– 

For  2004  the  maximum  theoretical  risk  amounts  to  EUR  1 194  million 
and is estimated to reach EUR 3 667 million in 2012. 

The maximum theoretical risk in respect of Member States is the same as 
the maximum annual risk reported in paragraph 3.2. 

For the non-member States it amounts to EUR 869 million for 2004. The 
risk is estimated to reach EUR 3 404 million by 2012. 

4. 

ACTIVATION OF BUDGET GUARANTEES 

4.1. 

Payments from cash resources 

The Commission draws on its cash resources6 in order to avoid delays and resulting 
costs  in  servicing  its  borrowing  operations  when  a  debtor  is  late  in  paying  the 
Commission. 

4.2. 

Activation of the Guarantee Fund 

Council  Regulation  (EC,  Euratom)  No  2728/94  of  31  October  1994,  as  amended, 
established a Guarantee Fund for external actions. 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 payment is due. 

If  a  borrower  defaults  on  an  EIB  loan  guaranteed  by  the  Union  budget,  the 
Community  guarantee  is  called  upon  at  the  earliest  three months  after  the  date  on 
which  payment  has  fallen  due.  The  Community  will  act  within  three  months  of 

6 

Under Article 12 of Council Regulation (EC, Euratom) No. 1150/2000 of 22 May 2000, implementing 
Decision 94/728/EC, Euratom, on the system of the Communities' own resources. 

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receiving  such  a  letter  from  the  EIB  calling  for  the  guarantee  to  be  activated, 
authorising the EIB to take the corresponding amounts from the Guarantee Fund. 

Default interest owed by loan beneficiaries for the time between the date on which 
cash resources are made available by the Union budget and the date of activation of 
the  Fund  is  drawn  from  the  Fund  and  repaid  to  the  Union  budget.  For  EIB  loans, 
default  interest  is  calculated  during  the  period  between  the  due  date  of  a  defaulted 
loan  instalment  and  the  date  of  receipt  of  the  cash  resources  by  the  EIB  from  the 
Commission. 

5. 

ANALYSIS  OF  THE  COMMUNITY'S  THEORETICAL  LENDING  AND  GUARANTEE 
CAPACITY IN RESPECT OF NON-MEMBER STATES 

In  practice,  the  Guarantee  Fund  mechanism  limits  the  Community's  lending  and 
guarantee  capacity  to  non-member  States,  since  the  appropriations  available  for 
provisioning the Fund are limited by the amount entered for the Guarantee Reserve 
in the Financial Perspectives7. 

Table A4 shows an estimate of the Community's lending capacity in respect of non-
member  States  over  the  period  2004-2006  in  line  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  or  the  Commission  and 
decisions  proposed  and  forecasted  (see  in  Annex  Table  A4),  an  amount  of  EUR 
208.07 million is expected to be used from the Guarantee Reserve in 20048, leaving 
EUR 12.93 million available for further guaranteed lending operations. 

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 forecasted for 2004, 
the annual capacity available for loans is as follows: 

– 

– 

EUR 143.71 million for loans with a 100% guarantee under the Union budget, 
or 

EUR  221.09  million  for  loans  with  a  65%  guarantee  (in  accordance  with 
Council Decision 2000/24/EC of 22 December 1999). 

Table  2  shows  outstanding  lending  and  loan  guarantee  operations  for  non-member 
States totalled EUR 15 658 million (figure including the 10 new Member States), at 
30 June 2004. 

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The annual figure entered in the 2000-2006 Financial Perspectives is EUR 200 million at 1999 prices; 
in 2003, the amount was EUR 217 million and it is EUR 221 million in 2004. 
At  the  moment  of  finalising  this  report  (November  2004),  no  new  decisions  on  macro-financial 
assistance had been taken or launched. The use of the reserve could therefore be about EUR 17 million 
less than expected in June 2004. 

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Table 2: Outstanding lending and loan guarantee operations for non-member 
States in EUR million (rounded)

1. Capital outstanding, EC (MFA), Euratom
2. Capital outstanding, EIB1
3. Payments defaults
4. Default Interest
5. Unpaid interest due2
Amount outstanding at 30 June 2004
1 including the ten new Member States
2 unpaid interest due within the meaning of the Regulation establishing the  Guarantee Fund

1 499
14 003
 2
 1
 153
15 658

The ratio between the Fund’s resources and outstanding capital liabilities, within the 
meaning of the Regulation establishing the Fund, was 10.34%, which is higher than 
the  target  figure  of  9%  set  in  Regulation  No  1149/1999  amending  Regulation  No 
2728/94  establishing  the  Fund.  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 Union.  

6. 

SITUATION OF THE GUARANTEE FUND AT 30 JUNE 2004 

At  30 June 2004,  the  Guarantee  Fund  amounted  to  EUR  1 619.15  million.  The 
following movements were recorded in the first half of 2004: 

– 

– 

– 

– 

– 

– 

The second transfer of 2003 was the subject of payment of EUR 2.25 million 
dated 2 January 2004; 

on 24 February 2004 a call was made on the Fund as a result of a default on a 
loan to the Republic of Argentina for  an  amount  of  USD  2 689 781.25  (EUR 
equivalent 2 140 523.04); 

at 30 June 2004, the total arrears (excluding default interest) with the Republic 
of Argentina amount to USD 7 907 132.83 (EUR equivalent 6 968 656.91); 

the Commission was informed by EIB about arrears on a loan to the Republic 
of Argentina for an amount of USD 2 687 444.26 which will lead to a call on 
the Fund in the second half of 2004; 

net revenue of EUR 29.2 million on investments from the Fund’s assets as of 
30 June 2004; 

the first annual transfer will amount to EUR 161.76 million from the Reserve 
into  the  Fund.  A  second  transfer  of  EUR  20.115  million  will  be  made  at  the 
same  time  as  the  Commission  Decision  (C(2004)891/2)  allowing  a  new 
Euratom  loan  in  Romania.  The  Fund’s  surplus  of  the  year  2003  amounted  to 
EUR  223.16 million.  Those  amounts  will  be  netted  under  the  mechanism  for 
offsetting,  resulting  in  a  cash  payment  of  EUR  41.285  million  in  the  second 
half of 2004 from the Fund to the budget of the European Union. 

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7. 

RELATIVE SOLIDITY 

The ratio between the amount in the Fund at 30 June 2004 (EUR 1 619.15 million) 
and  the  maximum  theoretical  annual  risk  for  loans  to  non-member  States  in  2004 
(EUR 869 million) is estimated to 93% (see Annex Table A3)9. The increase of the 
ratio to 93% compared with 78% at 31 December 2003, is mainly due to the change 
of status of the accession countries into Member States as of 1 May 2004. Assuming 
the Commission proposal on the withdrawal of the ten new Member States from the 
Guarantee  Fund  is  adopted,  the  amount  in  the  Guarantee  Fund  would  come 
approximately to EUR 1 280 million and the ratio would be about 74%. 

9 

Please  note  that  the  estimate  for  the  maximum  theoretical  annual  risk  for  the  year  2004  reported  in 
Table  A3  refers  to  the  2nd  half  of  2004  only.  For  reasons  of  comparability,  this  amount  has  been 
normalised on a 12 month period for the above comparison. 

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Part Two: 
Evaluation of potential risks: Economic and financial situation of 
the non-member countries benefiting from the most important 
loan operations 

1. 

INTRODUCTION 

The figures in Part One provide information on quantitative aspects of the risk borne by the 
general budget. However, this data should be accompanied by an assessment of the quality of 
the  risk,  which  depends  on  the  type  of  operation  and  the  standing  of  the  borrower.  Unlike 
previous reports, the country risk evaluation is now presented separately in the Commission 
Staff Working Paper SEC(2004)1629). A brief summary of this analysis is provided below. 

2. 

CANDIDATE COUNTRIES 

General  government  debt  and  total  external  debt  of  Bulgaria  have  continued  falling 
respectively to close to 40% and 55% of GDP, following the buy-back of some Brady bonds 
which reduced debt-to-GDP ratios by about 3 percentage points. 

The  outlook  for  the  economy  of  Romania  points  to  sustained  economic  growth,  a  further 
decline  in  inflation  and  a  significant  but  stable  current  account  deficit  above  5.5%  of  GDP. 
The total foreign debt-to-GDP ratio remains low at around 34% of GDP.  

Turkey remains vulnerable to external shocks and financial markets sentiment, in particular 
because of the sheer size of its rising public sector borrowing requirements, public debt and 
gross foreign debt (estimated at respectively 20%, 80% and 53% of GDP in 2004). The debt 
servicing to exports of goods and services ratio is projected at about 40% in 2004. 

3. 

WESTERN BALKANS  

The external debt of Bosnia and Herzegovina has been declining and is currently equivalent 
to 34% of GDP. The debt service ratio has also had a downward trend in the last two years 
and is expected to be 7% of GDP for 2004, while international reserves cover a comfortable 
4.5  months  of  imports.  However,  a  settlement  concerning  old  claims  on  the  government  is 
expected  to  be  reached  in  the  near  future  and  will  increase  public  debt  by  at  least  10%  of 
GDP. 

In 2003, the external debt of Former Yugoslav Republic of Macedonia as a share of GDP 
declined  by  3  percentage  points  to  38%,  and  is  expected  to  stay  at  the  same  level  in  2004. 
Debt servicing obligations decreased to 14% of exports of goods and services in 2003 and are 
projected around the same level in 2004. 

The  external  sector  of  Serbia  and  Montenegro  remains  vulnerable  given  weak  export 
performance  and  uncertain  medium-term  prospects  for  private  capital  inflows.  In  2004,  the 
current account deficit is projected at 11% of GDP and the external debt-to-GDP ratio at 54%. 

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Financing requirements continue to be high, caused by rising debt servicing as grace periods 
run out. 

4. 

NEW INDEPENDENT STATES 

The  gross  international  reserves  of  the  Central  Bank  of  Armenia  are  comfortably  high, 
covering  nearly  four  months  of  imports.  In  nominal  terms  the  public  external  debt  is  about 
USD  1.1  billion,  while  as  a  ratio  to  GDP  it  is  projected  to  decline  further  from  about  39 
percent in 2003. 

In the first half of 2004, GDP growth in Belarus has reached an annual rate of 10.3%. Despite 
the  improvement,  however,  the  economy  remains  constrained  on  a  number  of  counts;  in 
particular,  foreign  exchange  reserves  are  very  low  at  less  than  one  month  of  imports,  while 
the country is now facing higher prices for gas supplies from Russia. 

The gross international reserves of the National Bank of Georgia remain equivalent to only 
1.5 months of imports. Georgia’s public external debt increased in 2003, reaching about USD 
1.8 billion (about 49.5% of GDP). In July 2004, Paris Club creditors agreed to a restructuring 
of Georgia’s external debt expected to reduce debt service due to those creditors from USD 
169.2 million to USD 46.4 million. 

Moldova's  economy  has  not  made  clear  progress  in  tackling  long-standing  structural 
problems,  such  as  an  unsatisfactory  business  climate  and  reliance  on  a  narrow  range  of 
traditional  products.  Macro  stability  remains  elusive  given  the  public  sector's  continuing 
inability  to  fully  service  foreign  debt,  high  inflation  and  a  constrained  balance  of  payments 
situation. 

Last  June,  an  agreement  was  reached  between  Tajikistan  and  the  Russian  authorities 
allowing the Tajik external debt to fall to USD 700 million or about 50% of GDP. However, 
after a sizeable improvement in 2003, the current account deficit is widening again in 2004, 
due to the continuing strong increase in imports whose coverage by gross official reserves is 
projected at 1.9 months at end-2004, identical to the year before. 

The balance of payments of the Ukraine is in a comfortable position as the current account 
shows a large surplus, projected to reach a record high of about 10 percent in 2004 of GDP 
(5.8 percent in 2003). This has resulted in a rapid accumulation of foreign exchange reserves 
at the National Bank, equivalent to nearly four months of imports. The public external debt to 
GDP ratio is expected to decline from 22.5% in 2003 to about 19% in 2004. 

5. 

OTHER NON-MEMBER COUNTRIES 

Despite the improvement in the macroeconomic situation, the risk associated with lending to, 
or  investing  in,  Argentina  remains  high.  The  lack  of  progress  with  some  key  structural 
reforms and the delays in reaching a debt restructuring agreement with private creditors has 
led  to  a  postponement  of  the  third  review  under  the  current  SBA  with  the  IMF  while  the 
country  continues  to  run  arrears  on  some  of  its  payments  to  the  EIB  (see  section 6  in  part 
one). 

Although the rise in foreign exchange reserves, the comfortable current account position and 
the  recent  steps  taken  by  the  authorities  to  improve  the  composition  of  public  debt  have 

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increased  the  country’s  resilience,  Brazil  remains  vulnerable  to  a  change  in  investor 
sentiment towards emerging markets. 

Despite broadly unchanged debt stocks (in USD terms), the foreign debt/GDP ratio of Algeria 
is  expected  to  fall  by  5  percentage  points  to  30.6%  of  GDP  in  2004  and  the  foreign  debt 
service ratio from 79.5% in 2003 to 62.2% in 2004. Foreign debt is almost exclusively public 
medium and long-term debt and there have been no payment arrears over recent years. 

While further efforts of fiscal consolidation are called for, there are no immediate concerns of 
sustainability  given  Jordan’s  recent  strong  external  performance  (notably  the  large  current 
account surplus and building up of reserves), which is expected to continue in the near future. 

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