Communication from the Commission to the Council - Review of the Facility Providing Medium-Term Financial Assistance to Member States under Article 119 of the Treaty
Date: 2005-07-25
Institutions: European Commission
Subjects: EU Member State, balance of payments, balance of payments assistance, support mechanism

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.7.2005 
COM(2005) 331 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Review of the Facility Providing Medium-Term Financial Assistance to 
Member States under Article 119 of the Treaty 

EN 

   EN 

 
 
 
  
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Review of the Facility Providing Medium-Term Financial Assistance to 
Member States under Article 119 of the Treaty 

1. 

BACKGROUND 

Under  Article  119  of  the  Treaty,  a  Community  facility  exists  for  providing  medium-term 
financial assistance to Member States, which have not adopted the euro and are experiencing, 
or are threatened with, difficulties in their balance of payments on current or capital accounts. 
The  facility  is  governed  by  Council  Regulation  (EC)  No  332/2002  of  18 February  2002 
(hereafter referred to as “the Regulation”).1 The Regulation stipulates that, every three years, 
the  Council  should  examine  the  extent  to  which  the  facility  still  serves  its  purpose,  in  its 
principle, arrangements and the specified ceiling for outstanding loans under the facility. The 
Council examination should be made on the basis of a report from the Commission and after 
the Economic and Financial Committee (EFC) has delivered an opinion. As three years have 
elapsed  since  the  adoption  of  the  Regulation,  the  Commission  has  prepared  this 
Communication as a report to the Council on the functioning of the facility. 

2. 

MAIN FEATURES OF THE FACILITY 

The  facility  is  designed  to  allow  substantial  financial  assistance  to  be  granted  in  a  timely 
manner.  The  beneficiary  Member  State  should  receive  the  assistance  soon  enough  to  allow 
economic policy measures to be taken so as to avoid an acute balance of payments crisis and 
to support efforts towards convergence. In this way, access to the facility – together with the 
economic  conditions  attached  to  any  financial  assistance  -  can  serve  to  increase  financial-
market confidence in the ability of the beneficiary Member State to restore a sound balance of 
payments situation.2 

The facility may be activated by the Council on the initiative of the Commission (pursuant to 
Article  119)  in  agreement  with  the  Member  State  seeking  Community  financing  or  at  the 
direct  request  of  the  Member  State  concerned.  Once  the  facility  has  been  activated,  the 
Council  examines  the  situation  in  the  Member  State  seeking  assistance  and  decides  (a) 
whether to grant a loan or appropriate financing facility, its amount and its average duration; 
(b)  the  economic  policy  conditions  attached  to  the  medium-term  financial  assistance  with  a 
view to re-establishing a sustainable balance of payments situation; and (c) the techniques for 
disbursing  the  loan  or  financing  facility,  the  release  or  drawings  of  which  are,  as  a  rule,  by 
successive  instalments.  Council  decisions  to  provide  assistance  via  the  facility  are  taken  by 
qualified  majority  on  a  proposal  from  the  Commission,  which  is  made  after  consulting 
the EFC. 

1 

2 

Official  Journal  L  53,  23.2.2002,  corrigendum:  Official  Journal  L  349,  24.12.2002.  The  2002 
Regulation replaced Council Regulation (EC) No 1969/88. 
A  Member  State  calling  upon  sources  of  financing  outside  the  Community,  which  are  subject  to 
economic policy conditions, must first consult the Commission and the other Member States in order to 
examine  the  possibilities  available  under  the  Community  medium-term  financial  assistance  facility. 
Such consultations will be held within the Economic and Financial Committee . 

EN 

2 

   EN 

 
                                                 
At regular intervals, the Commission, in conjunction with the EFC, verifies that the economic 
policy of the Member State receiving assistance accords with the commitments laid down in 
the  adjustment  programme  or  any  other  conditions.  The  Member  State  makes  all  the 
necessary  information  available  to  the  Commission  and  the  release  of  further  instalments 
depends on the findings of such verification. At the request of the beneficiary Member State, 
loans  may  carry  the  option  of  early  repayment.  In  cases  where  restrictions  on  capital 
movements are introduced or reintroduced (Article 120 of the EC Treaty) during the period of 
the  financial  assistance,  the  conditions  and  arrangements  governing  financial  assistance  are 
re-examined.  

3. 

FINANCING OF LOANS VIA THE FACILITY 

The  outstanding  amount  of  loans  to  be  granted  to  Member  States  under  the  facility  for 
medium-term  financial  assistance  is  currently  limited  to  €12  billion.  The  Commission  is 
empowered to contract the corresponding borrowings up to this ceiling on the capital markets 
or with financial institutions on behalf of the European Community. Borrowing and lending 
operations  are  carried  out  in  euros,  use  the  same  value  date  and  must  not  involve  the 
Community in the transformation of maturities, in any exchange or interest-rate risk or in any 
other commercial risk. The ECB makes the necessary arrangements for the administration of 
the loans.3 The Council also decides any full or partial financing of medium-term assistance 
by recourse to the Member States. 

At the request of the debtor Member State and where circumstances permit an improvement 
in  the  interest  rate  on  the  loans,  the  Commission  may  refinance  all  or  some  of  its  initial 
borrowings  or  restructure  the  corresponding  financial  conditions.  These  operations  may  not 
have  the  effect  of  extending  the  average  duration  of  the  borrowing  concerned  or  increasing 
the  amount  of  capital  outstanding.  The  cost  incurred  in  concluding  and  carrying  out  each 
operation is borne by the beneficiary Member State. The EFC must be kept informed of these 
operations.  Loans  granted  as  medium-term  financial  assistance  may  be  granted  as 
consolidation of short-term monetary support made available by the European Central Bank 
(ECB) under the very short-term financing facility. 

4. 

EVALUATION  OF  THE  PRINCIPLE,  AND  CEILING  FOR  OUTSTANDING  LOANS  UNDER 
THE FACILITY 

Since the adoption of the Regulation, the facility has not been activated.4 None of the eligible 
Member  States  has  experienced  or  has  been  threatened  with  difficulties  in  their  balance  of 
payments  within  this  period.  In  consequence,  the  adequacy  of  the  facility  in  terms  of  its 
principle, arrangements and the ceiling on outstanding loans has not been tested in the context 
of a Member State(s) in actual need of Community financing. 

3 

4 

Decision  ECB/2003/14  of  the  European  Central  Bank  of  7  November  2003  concerning  the 
administration of the borrowing-and-lending operations concluded by the European Community under 
the medium-term financial assistance facility [Official Journal L 297 of 15.11.2003]. 
The most recent decision to activate the facility was taken by the Council under the previous Regulation 
in  January  1993,  when  Italy  received  a  loan  of  €8  billion  in  four  instalments.  Only  the  first  two 
instalments  of  €  2  billion  each  were  made,  as  the  subsequent  improvement  in  the  Italian  balance  of 
payments situation made the disbursement of the remaining instalments unnecessary. 

EN 

3 

   EN 

 
                                                 
Although the need for medium-term financial assistance has not arisen since the Regulation 
was  adopted,  the  principle  and  underlying  rationale  of  the  facility  remains  valid.  The 
enlargement of the Union on 1 May 2004 has expanded the number of eligible Member States 
from  three  to  thirteen.  As  long  as  these  Member  States  have  not  adopted  the  euro,  they  are 
entitled  to  seek  medium-term  financial  assistance  from  the  Community  in  the  event  of 
problems in their balance of payments. The current ceiling of €12 billion on outstanding loans 
under the facility was decided by the Council in anticipation of future enlargements5. While 
the current ceiling implied a reduction from the ceiling of €16 billion provided by the 1988 
Regulation, the Commission believes that it remains at a sufficiently high level to satisfy the 
simultaneous  needs  of  several  Member  States.  Accordingly,  no  change  to  the  principle, 
arrangements  for  operating  the  facility  or  to the  ceiling  on  outstanding  loans  is  proposed  at 
this stage. 

5. 

UPDATE OF COMMUNITY’S EUROPEAN MEDIUM-TERM NOTE (EMTN) PROGRAMME 

The  Regulation  governing  the  facility  requires  that  appropriate  procedures  and  instruments 
should be in place to enable the Community to provide medium-term financial assistance in a 
timely  manner.  In  this  context,  it  should  be  noted  that  the  Commission  has  updated  its 
framework agreement – European Medium-Term Note (EMTN) programme - on the issuance 
of bonds. The documentation associated with the updated framework has now been brought 
into line with current financial-market standards. In addition, the updated EMTN programme 
enables the Commission to issue directly up to €4 billion on behalf of the Community and/or 
Euratom, with maturities between three months to 30 years suited to the specific project to be 
financed.6  The  size  of  the  programme  reflects  a  realistic  assessment  of  near-term  financing 
needs and could be rapidly increased at the Commission initiative, if needed. 

The EMTN programme does not only serve the facility for medium-term financial assistance. 
EMTN  issuance  is  also  used  to  finance,  on  a  back-to-back  basis,  loans,  which  (i)  the  EU 
grants as financial assistance to non-Member States in serious financial need; and (ii) Euratom 
may  grant  to  Member  States,  certain  central  and  eastern  European  countries  and  the  CIS  to 
help improve the safety of nuclear power stations. The new programme has already been used 
for transactions totalling € 1.66 billion, June 2005. 

In the context of updating the EMTN programme, collective action clauses (CACs) have been 
introduced  to  the  associated  documentation,  in  conformity  with  the  common  understanding 
adopted  by  the  EFC  in  September  2003.  CACs  are  designed  to  improve  the  rights  of 
bondholders by introducing provisions on collective representation, majority restructuring and 

5 

6 

At the time of adoption of the Council Regulation (EC) No 332/2002 of 18 February 2002, the acceding 
countries included, the ten new Member States, Bulgaria and Romania. 
The  new  programme  replaces  a  programme,  which  was  originally  introduced  in  1994  and  updated  in 
1999  and  was  limited  to  €  2  billion.  The  programme  will  be  implemented  by  Goldman  Sachs  and 
Deutsche  Bank  who  will  be  responsible  for  placing  the  bonds  with  European  and  international 
investors. 

EN 

4 

   EN 

 
                                                 
enforcement  in  the  event  of  default  by  the  issuer.  The  inclusion  of  CACs  in  the  EMTN 
documentation accords with the declaration of Member States and the Commission to lead by 
example in including CACs in their international debt issuance instruments so as to promote 
international efforts for orderly restructurings in the event of sovereign debt crises.7 

6. 

CONCLUSION 

This  Communication  is  the  first  three-yearly  report  to  the  Council  on  the  principle, 
arrangements  and  outstanding  loan  ceiling  under  the  Community  facility  for  medium-term 
financial assistance, as mandated by the relevant Council Regulation. As none of the eligible 
Member States has activated the facility in the review period, the principle, arrangements and 
ceiling  for  outstanding  loans  under  the  facility  have  not  been  tested.  Nevertheless,  the 
Commission  believes  that  the  facility  continues  to  meet  the  potential  needs  of  the  eligible 
Member States and, accordingly, no change to the facility is proposed at this stage. 

7 

In the context of international efforts to promote orderly restructurings in the event of sovereign debt 
crises, the EU Member States agreed to lead by example in including collective action clauses (CACs) 
in their international debt issuance. More specifically, the ECOFIN President announced to the IMFC of 
April 2003 that “the EU will use contractual provisions based on the framework developed by the G-10, 
and  where  necessary  in  accordance  with  applicable  law  and  adjusted  to  local  legal  practice,  in  their 
central government bonds issued under a foreign jurisdiction and/or governed by a foreign law by the 
end of this year. Thereafter, EU Member States will no longer issue such bonds without any CACs.” On 
the same occasion, the Commissioner for Economic and Monetary Affairs indicated that CACs would 
also be included in the documentation relating to the Communities’ issuance. 

EN 

5 

   EN