Report from the Commission to the budgetary authority on guarantees covered by the general budget situation at 31 December 2004 {SEC(2005) 915}
Date: 2005-07-07
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.7.2005 
COM(2005) 306 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
situation at 31 December 2004 

{SEC(2005) 915} 

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TABLE OF CONTENTS 

Part One: Events since the Report at 30 June 2004, 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 30 June 2004 ....................................................................... 3 

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

Capital outstanding at 31 December 2004 ................................................................... 4 

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

Maximum theoretical annual risk borne by the Union budget: operations disbursed 
and decided at 31 December 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 31 December 2004 ............................................... 6 

Relative solidity ........................................................................................................... 7 

Part Two: Evaluation of potential risks: Economic and financial situation of the non-member 
countries benefiting from the most important loan operations .................................................. 8 

1. 

2. 

3. 

4. 

Introduction.................................................................................................................. 8 

Candidate countries...................................................................................................... 8 

Western Balkans .......................................................................................................... 8 

New Independent States............................................................................................... 9 

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Part One: Events since the Report at 30 June 2004, the risk 
situation and activation of Budget Guarantees 1 

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  European 
Communities with macroeconomic objectives (balance-of-payments loans to Member States 
and  macro-financial  assistance  (MFA)  loans  to  non-member  States)  and  loans  with 
microeconomic objectives (Euratom and EC-NCI2 loans in Member States and Euratom and 
European Investment Bank (EIB) loans3 in non-member States). 

2. 

EVENTS SINCE THE REPORT AT 30 JUNE 2004 

Regarding  macro-financial  assistance  provided  to  third  countries,  the  Council  decided  on 
7 December 2004 to extend previous decisions providing further macro-financial assistance to 
Serbia  and  Montenegro  (2004/862/EC)  and  to  Bosnia  and  Herzegovina  (2004/861/EC). 
Regarding the New Independent States (NIS), no new Council Decision was made, whereas 
the Commission  adopted on 10 December 2004  a Communication on the implementation of 
macro-financial assistance in Armenia, Tajikistan and Georgia.4 

Disbursement amounted to a total of EUR 22 million in the form of grants: EUR 10 million 
for Serbia and Montenegro, EUR 5.5 million for Armenia and EUR 6.5 million for Georgia. 

Regarding Euratom, a loan disbursement was carried out on the basis of an existing decision 
in favour of Bulgaria (Kozloduy, EUR 30 million). 

A  new  Commission  decision  amending  decision  (C(2000)3812)  of  13 December 2000  was 
adopted  and  reduced  the  Euratom  loan  amount  decided  in  favour  of  Ukraine  for  the  K2R4 
plant5. 

Concerning  the  EIB’s  mandates,  on  22  December  20046,  the  Council  decided  to  amend 
Decision  2000/24/EC  to  take  into  account  the  enlargement  of  the  European  Union  and  the 
European Neighbourhood Policy. 

On the same date7, the Council decided to grant a Community guarantee to the EIB against 
losses under loans for certain types of projects in Russia, Ukraine, Moldova and Belarus; the 

1 

2 
3 
4 
5 
6 
7 

Please note that the annex contains a Commission Staff Working Paper with a set of detailed tables and 
explanatory notes to this report. 
New Community Instrument, not active since 1995. The last loan was fully amortized by 17.12.2004. 
The details concerning the EIB Mandates are displayed in Table A1 of the annex. 
COM(2004)793 final. 
C(2004)2817/3 of 20.7.2004 (EUR equivalent of USD 83 000 000). 
OJ L 21, 25.01.05, p.9. 
OJ L 21, 25.01.05, p.11. 

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overall ceiling amounts to EUR 500 million. The EIB benefits of an exceptional Community 
guarantee of 100%. The guarantee is to cover loans signed until 31 January 2007 (extendable 
by six months). 

With a view to the accession of ten new Member States on 1 May 2004, the Council adopted 
the  Regulation No. 2273/20048  to  amend  Council  Regulation  No. 2728/94  establishing  a 
Guarantee Fund for external actions. 

According  to  the  Commission  Communication  on  the  Financial  Perspectives  2007 - 20139, 
the amount of financing of the Guarantee Fund will not, in theory, 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  uses  the  established  measures  of  capital  outstanding,  maximum 
annual  risk  and  maximum  theoretical  annual  risk  borne  by  the  Community  budget  (its 
methodology is 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 31 December 2004 

The  total  risk  at  31 December 2004  came  to  EUR  15,284  million,  as  against  EUR  15,519 
million at 30 June 2004. 

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 31 December 2004*

EUR million (rounded)

Amount outstanding at 30 June 2004
Loan repayments

Loans disbursed

Euratom
NCI
Macro-financial assistance
EIB

Euratom
Macro-financial assistance
EIB

Exchange rate differences between EUR and other currencies
Amount outstanding at 31 December 2004

15,519

0
-18
-145
-747

30
0
1,265
-621
15,284

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

8 
9 

OJ L 396, 31.12.04, p. 28. 
COM(2004) 487. 

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The capital outstanding in respect of operations in the Member States was EUR 3,360 million 
at 31 December 2004, compared with EUR 3,635 million at 30 June 2004. 

The capital outstanding in respect of operations in non-member States at 31 December 2004 
was EUR 11,924 million, compared with EUR 11,885 million at 30 June 2004. 

3.2.  Maximum  annual  risk  borne  by  the  Union  budget:  operations  disbursed  at 

31 December 2004 (see Table A2 in Annex) 

– 

– 

– 

For 2005 the total maximum annual risk amounts to EUR 1,848 million. 

The risk in respect of Member States comes to EUR 544 million. 

The risk in respect of non-member States comes to EUR 1,304 million. 

3.3.  Maximum  theoretical  annual  risk  borne  by  the  Union  budget:  operations 

disbursed and decided at 31 December 2004 (see Table A3 in Annex) 

– 

– 

– 

For  2005  the  maximum  theoretical  risk  amounts  to  EUR  1,957  million  and  is 
estimated to reach EUR 3,546 million in 2013. 

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  1,413  million  for  2005.  The  risk  is 
estimated to reach EUR 3,324 million by 2013. 

4. 

ACTIVATION OF BUDGET GUARANTEES 

4.1. 

Payments from cash resources 

The Commission draws on its cash resources10 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 or guaranteed by the Community, the Guarantee Fund is called on to cover the default 
within three months of the date on which payment is due. 

10 

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

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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  current  Financial 
Perspectives11. 

Table A4 shows an estimate of the Community's lending capacity in respect of non-member 
States over the period 2005-2006 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. 

Table 2 shows that outstanding lending and loan guarantee operations for non-member States 
totalled EUR 12,068 million at 31 December 2004. 

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, EIB
3. Payments defaults
4. Default Interest
5. Unpaid interest due1
Amount outstanding at 31 December 2004
1 Unpaid interest due within the meaning of the Regulation establishing the Guarantee Fund

1,384
10,540
0
1
143
12,068

The ratio between the Fund’s resources and outstanding capital liabilities, within the meaning 
of the Regulation establishing the Fund, was 10.55%, 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 31 DECEMBER 2004 

At  31 December 2004,  the  Guarantee  Fund  amounted  to  EUR  1,612.09  million.  The 
following movements were recorded in the second half of 2004. 

– 

– 

– 

11 

The first and second transfers: EUR 181.875 million. 

The Fund’s surplus of the year 2003: EUR 223.16 million. 

Payment  of  a  call  on  27 August 2004:  USD 2,687,444.26  (EUR  equivalent 
2,230,059.13). 

The annual figure entered in the 2000-2006 Financial Perspectives is EUR 200 million at 1999 prices; 
in 2004, the amount was EUR 221 million and it is EUR 223 million in 2005. 

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– 

– 

– 

Recovery  of  arrears  on  21 December 2004:  from  the  Republic  of  Argentina: 
USD 10,013,111.37 (EUR equivalent 7,456,334.33). 

The  total  arrears,  at  31 December 2004,  i.e.  penalty  interest  with  the  Republic  of 
Argentina, amount to USD 1,718,492.13 (EUR equivalent 1,261,649.75). 

Net  revenue  of  EUR  28.9  million  from  investment  of  the  Fund’s  assets  as  of 
31 December 2004. 

7. 

RELATIVE SOLIDITY 

The  ratio  between  the  amount  in  the  Fund  at  31 December 2004  (EUR  1,612.09  million) 
reduced by the amount of EUR 338,831,402.07 following Regulation No 2273/2004 and the 
maximum  theoretical  annual  risk  for  loans  to  non-member  States  in  2005  (EUR 1,413 
million) is estimated at 90% (see Annex Table A3). 

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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. Tables on 
the  country  risk  evaluation  are  presented  separately  in  the  Commission  Staff  Working 
Paper12. A brief summary of this analysis is provided below. A section analysing the situation 
of the other non-member countries can be found under point 3.1 of the Annex. 

2. 

CANDIDATE COUNTRIES 

In Bulgaria, GDP growth continued to be strong, at 5.6% in the first three quarters of 2004 
year-on-year. The current account deficit was high at about 7.5% of GDP in 2004, but lower 
than in 2003 and largely covered by net FDI inflows. Foreign debt was stable relative to GDP 
at slightly above 60% of GDP, with a declining trend of public debt and an increasing trend of 
private debt so that they now have almost equal shares in total foreign debt. 

During  the  first  three  quarters  of  2004,  Romania’s  real  GDP  grew  by  8.1%.  Growth  was 
driven  by  strong  domestic  demand,  which  caused  strongly  negative  net  exports  and  the 
persistence  of  a  significant  current  account  deficit  in  the  vicinity  of  6%  of  GDP.  A 
considerable  pick-up  in  FDI  enabled  the  total  foreign  debt-to-GDP  ratio  to  remain  stable  at 
around 34% of GDP. 

Turkey’s GDP increased by 8.7% year-on-year in the first three quarters of 2004, driven by 
strong  private  consumption  growth  and  a  surge  in  domestic  investment.  High  growth  of 
domestic  demand  and  higher  international  oil  prices  led  to  a  sharp  rise  in  imports  in  2004, 
easily  offsetting  the  benefits  of  higher  exports  and  a  record  tourism  season.  As  a  result  the 
current  account  deficit  rose  to  an  estimated  5.2%  of  GDP.  Debt  levels  have  been  falling 
strongly. Foreign debt amounted to 53% of GDP at the end of 2004. 

3. 

WESTERN BALKANS  

Albania’s  GDP  grew  by  an  estimated  6.2%  in  2004,  facilitated  by  improvements  in 
agricultural  production,  a  buoyant  service  sector  and  a  rise  in  construction.  The  current 
account deficit is projected to have reached 5.8% of GDP in 2004 and the external debt level 
to remain relatively modest with a debt-to-GDP ratio of about 22.4%. 

12 

SEC(2005)… 

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In Bosnia and Herzegovina, GDP grew by an estimated 5% in 2004, driven mainly by rising 
industrial  production  and  domestic  demand,  and  the  economy  is  projected  to  continue 
growing  at  the  same  pace  in  2005.  Despite  a  record  inflow  of  FDI  and  increasing  exports 
during  2004,  high  imports  resulted  in  the  current  account  deficit  remaining  above  18%  of 
GDP.  External  debt  has  been  on  the  decline  over  recent  years  and  reached  34%  of  GDP  in 
2004. 

In the Former Yugoslav Republic of Macedonia GDP growth declined by 0.5% during the 
first  three  quarters  of  2004,  mainly  due  to  continued  weak  growth  in  manufacturing. 
However, for 2004 as a whole, a positive growth rate is likely, while for 2005 acceleration to 
2.5% is expected. The current account deficit reached nearly 7% of GDP in 2004, owing to a 
large trade deficit and lower private and official transfers. Foreign exchange reserves declined 
to  3.5  months  of  imports  in  the  second  half  of  2004  from  4  months  at  the  end  of  2003.  In 
2004, the external debt-to-GDP ratio increased marginally, from 35.2% at end-2003 to 35.7% 
at end-2004. 

GDP  growth  has  recovered  in  Serbia  and  Montenegro  and  is  estimated  to  have  reached 
7.2% in 2004, reflecting a rebound in industrial output and agricultural production. External 
imbalances, fuelled by week export performance, remain on the high side. In 2004, the current 
account deficit is estimated to have reached about 12% of GDP. However, the debt-to-GDP 
ratio  declined  to  57%,  as  a  result  of  a  restructuring  agreement  with  the  London  Club  of 
creditors. 

4. 

NEW INDEPENDENT STATES 

In Armenia, where output growth remained over 10% in 2004, strong remittances and other 
transfers helped to narrow down the current account deficit to below 5% of GDP in 2004. The 
Central  Bank’s  international  reserves  are  comfortably  high  covering  nearly  four  months  of 
imports. The public external debt is about USD 1.1 billion, or about 33% of GDP (down from 
about 39% in 2003). 

Georgia’s  current  account  deficit  widened  somewhat  as  high  import  demand  for  the 
construction of the BTC pipeline offset the increase in remittances and official transfers. Yet, 
the  National  Bank  managed  to  increase  its  international  reserves  to  nearly  two  months  of 
imports.  Georgia’s  public  external  debt  remained  broadly  unchanged  in  nominal  terms  but 
decreased  as  a  ratio  to  GDP  from  46%  in  2003  to  about  37%.  In  the  second  half  of  2004, 
Georgia concluded bilateral agreements with most of its Paris Club creditors in line with the 
July 2004 agreement. 

In Ukraine, GDP growth reached a record high rate of 12%. At the same time, inflation of 
12.3%  exceeded  all  projections.  The  National  Bank  of  Ukraine  tightened  monetary  policy 
gradually but the fiscal imbalances (the general government deficit was over 4% of GDP in 
2004)  have  yet  to  be  addressed  by  the  new  Government.  The  current  account  ended  with  a 
surplus of over 10% of GDP. Foreign exchange reserves increased to an equivalent of above 
three months of imports. The ratio of public external debt to GDP decreased further, in line 
with the strong GDP growth, to about 19%. 

The  economy  of  Belarus  has  continued  benefiting  from  growth  in  Russia,  its  main  trade 
partner (in 2004, GDP growth reached 11%). Inflation was cut from 28% in 2003 to 14% in 
2004 but it remains the highest in the region, reflecting lax financial policies. However, the 

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General Government account turned to a surplus for the first time for several years. External 
debt has remained modest, and the debt-to-GDP ratio has dropped to less than 20%. Despite 
the  improvement,  however,  the  Belarus  economy  remains  constrained  on  a  number  of 
accounts; in particular, foreign exchange reserves are very low. 

In  Moldova,  GDP  growth  exceeded  7%  in  2004  but  inflation  remained  in  double-digits 
reflecting  strong  domestic  demand  accommodated  by  rapid  money  growth  (the  result  of 
booming  remittances).  The  fiscal  stance  was  relaxed  considerably  in  2004.  Moldova  has 
secured  some  debt  relief  from  its  private  creditors  and  has  resumed  paying  interest  to  Paris 
Club creditors. As a result, the debt-to-GDP ratio was cut to less than 40%. Yet the economy 
remains  extremely  fragile.  The  current  account  deficit  approached  7%  of  GDP  and  foreign 
direct investment is held back by a history of State interference in the economy. 

Tajikistan’s  economy  continues  to  grow  strongly  –  real  GDP  growth  was  about  10.5%  in 
2004.  The  current  account  deficit  widened  from  1.3%  to  nearly  2%  as  increasing  export 
revenues and migrants’ remittances were more than offset by import increases associated with 
rapid growth. Import coverage of gross official reserves exceeded 2 months by year-end. At 
end-2003, total external debt amounted to USD 1 billion (73% of GDP), of which USD 300 
million was owed to Russia. In October 2004, an agreement with Russia was signed, writing 
off 80% of Tajikistan’s bilateral debt and exchanging the remainder for equity (by end-2008). 

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