Report from the Commission to the Council and the European Parliament on the borrowing and lending activities of the European Communities in 2004 {SEC(2005) 1053}
Date: 2005-08-23
Institutions: European Commission
Subjects: Community loan, EIB loan, EU borrowing, activity report, third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.08.2005 
COM(2005) 385 final 

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REPORT FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

ON THE BORROWING AND LENDING ACTIVITIES 
OF THE EUROPEAN COMMUNITIES IN 2004 

{SEC(2005) 1053} 

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TABLE OF CONTENTS 

Introduction ................................................................................................................................ 3 

1. 

2. 

2.1. 

2.2. 

2.3. 

BORROWING ACTIVITIES IN 2004........................................................................ 3 

LENDING IN NON-MEMBER STATES................................................................... 4 

Overview ...................................................................................................................... 4 

The Community's Macro-Financial Assistance ........................................................... 4 

EIB Lending in 2004 in Central and Eastern Europe, the Mediterranean, Asia & 
Latin America and the Republic of South Africa......................................................... 5 

2.3.1.  EIB Objectives and Priorities....................................................................................... 5 

2.3.2.  Lending Activity .......................................................................................................... 6 

2.3.3.  Risk Sharing ................................................................................................................. 6 

2.3.4.  Cooperation with other Institutions.............................................................................. 6 

2.4. 

Signatories of the Lomé/Cotonou Conventions - Lending Activity ............................ 7 

3. 

3.1. 

3.2. 

3.3. 

BUDGETARY IMPACT OF LENDING .................................................................... 7 

Budget Guarantees ....................................................................................................... 7 

Interest Subsidies ......................................................................................................... 8 

Venture capital ............................................................................................................. 8 

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INTRODUCTION 

The  Council  decisions  establishing  the  various  lending  instruments  of  the  European 
Communities require the Commission to inform the Council and Parliament each year of the 
use made of these instruments. 

As  for  lending  activities  outside  the  Community,  the  decisions  adopted  in  1997  and  20001 
require  the  Commission  to  inform  the  Council  and  Parliament  on  an  annual  basis  of  the 
situation regarding European Investment Bank (EIB) loans guaranteed by the Union budget in 
Central and Eastern Europe, in the Mediterranean countries, in Latin America and Asia and in 
South  Africa.  These  same  obligations  were  extended  to  further  decisions  (references  of 
decisions are listed in footnote no. 4). 

In order to meet these information requirements, this report describes the operations for each 
of  the  areas  concerned.  To  complete  the  picture  of  lending  activities,  it  also  gives  a  brief 
summary of the macro-financial assistance provided by the Community to third countries and 
of  the  interest  subsidies  and  guarantees  associated  with  Community  loans.  In  addition,  it 
provides information on Euratom’s lending activities. 

The tables on this report are published in a Commission Staff Working Paper. References to 
tables in the text refer to the Staff Working Paper. 

1. 

BORROWING ACTIVITIES IN 2004 

In  order  to  finance  the  lending  activities  decided  by  the  Council,  the  Commission  is 
empowered to borrow, on behalf of the respective Community (ECSC, EC, Euratom), funds 
on  the  capital  market.  However,  given  that  the  New  Community  Instrument  (NCI)  ceilings 
have  been  fully  used  up  and  the  ECSC  Treaty  expired  in  2002,  no  funds  were  raised  under 
these instruments in 2004. One borrowing for macro-financial assistance in 2004 was raised 
to  grant  a  loan  to  Bosnia  and  Herzegovina.  There  were  two  borrowings  under  the  Euratom 
loans instrument to finance loans to a nuclear plant in Bulgaria. 

Despite the above-mentioned factors, total borrowing by the European Communities and the 
EIB increased in 2004 by 18.8% to EUR 49.9 billion, against EUR 42.1 billion the previous 
year (see Table 1.1), mainly due to an increase in borrowing by the EIB. 

Taking  into  account  repayments,  cancellations  and  exchange-rate  fluctuations,  the  total 
amount of borrowing outstanding at 31 December 2004 was EUR 216.6 billion, 10.3% up on 
2003 (see Table 1.2). 

The  breakdown  of  borrowing  by  currency  (see  Table 1.3)  shows  a  decrease  in  the  share  of 
Euro  borrowings  in  2004  to  44.9%  from  54.9%  in  2003  of  all  issues,  while  issues  in  other 
Community  currencies  decreased  from  19.1%  to  13.0%.  Non-Community  currencies  took  a 
greater share of borrowing, increasing from 26.0% to 42.0% of the total. Issues in USD were 
up from 23.0% to 41.6% on strong market demand and supported by very low interest rates 
and a weakening of the USD/Euro exchange rate. 

1 

Decision 97/256/EC for the first global mandate and 2000/24/EC, as amended, for the second mandate. 

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Low interest rates and economic and financial uncertainties led  the European Institutions to 
continue to favour variable-rate loans. All borrowings were on a variable rate in 2004, against 
99.3% in 2003. 

The last borrowing under NCI was fully amortized at the end of 2004. 

2. 

LENDING IN NON-MEMBER STATES2 

2.1. 

Overview 

Financial  support  for  non-member  States  that  have  concluded  cooperation  agreements  with 
the Community takes a variety of forms depending on the geographical areas concerned and 
the objectives pursued. It generally takes the form of bilateral loans (macro-financial support 
or  balance-of-payments  support),  where  the  Community  helps  to  re-establish  a  country's 
macro-economic  balance.  The  Commission  administers  these  financial  operations  under 
decisions of the Council. 

In other cases loans are granted either in the form of direct financing for individual projects or 
of global loans  to  banks, which then allocate funds  to smaller-scale local  projects. The EIB 
manages these loans on its usual terms, generally with the guarantee of the Union budget. 

The  Euratom  loans  instrument  is  available  for  financing  operations  in  Member  States  and 
certain non-member States at the time of the Decision (Armenia, Bulgaria, Czech Republic, 
Hungary, Lithuania, Romania, Russia, Slovakia, Slovenia and Ukraine). 

The  geographical  regions  in  which  the  Community  conducts  lending  activities  are  listed  in 
annex (see Table 2.1). 

2.2. 

The Community's Macro-Financial Assistance 

Macro-financial assistance (MFA) in the form of loans is, by its very nature, exceptional and 
forms  part  of  the  efforts  of  the  international  community  to  provide,  in  conjunction  with  the 
Bretton  Woods  institutions,  balance-of-payments  support  to  certain  countries  facing 
focuses  on 
transitional  macro-economic  difficulties.  The  Community’s  assistance 
neighbouring  regions,  such  as  Central  and  Eastern  Europe,  the  Western  Balkans  and  the 
Caucasus.  Disbursements  are  subject  to  the  beneficiary  countries  meeting  objectives  for 
macro-economic  stabilisation  and  structural  reforms.  In  these  circumstances,  the  number  of 
operations undertaken each year is limited, and it is difficult to make valid comparisons for 
the assistance given from one year to the next. 

Grants  and  loans  disbursed  under  this  instrument  are  listed  in  the  annex  (see  Table 2.2). 
Moreover, information is also given in the annual Commission Report on the implementation 
of MFA to third countries3. 

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There were no lending activities to Member States by the Communities. As the accession of ten new 
Member  States  took  place  on  1 May  2004,  the  guaranteed  loans  to  these  countries  ceased  to  be 
considered as external actions from that date. 
COM(2005) 245 and its annex SEC(2005)747. 

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2.3. 

EIB Lending in 2004 in Central and Eastern Europe, the Mediterranean, Asia 
& Latin America and the Republic of South Africa4 

Section 2.3 constitutes the annual report for 2004 to be submitted to the European Parliament 
and the Council in accordance with Article 2 of Council Decision 2000/24/EC, as amended. 

2.3.1.  EIB Objectives and Priorities 

In  Central  and  Eastern  Europe,  the  Bank  has  again  been  active  in  2004  although  the 
number  of  countries  eligible  for  financing  under  the  pre-Accession  agreements  diminished 
following  enlargement  on  May  1st.  After  that  date,  the  Bank  continued  activities  in  the 
remaining acceding and candidate States (Bulgaria, Romania, Croatia and Turkey) as well as 
continuing to support investments in the countries of the Western Balkans in various sectors 
(infrastructure, SMEs / micro-finance, etc.). 

In  2004,  the  Bank  continued  operations  under  the  Special  Lending  action  for  selected 
environmental  projects  in  Baltic  Sea  basin  of  Russia  while  continuing  to  prepare  for  a  new 
mandate covering operations in Russia and, for the first time, extended to Belarus, Moldova 
and Ukraine5. 

The  EIB  gives  priority  to  upgrading,  modernising  and  developing  the  communications  and 
energy sectors, with particular emphasis on Trans-European Networks (TENs) on the basis of 
the road and rail corridors defined by the Pan-European Conference of Transport Ministers as 
development priorities for the medium term. 

Environmental  issues  related  to  EIB  projects,  as  well  as  environmental  projects  per  se,  are 
given  priority  in  the  framework  of  the  gradual  adaptation  of  the  legislation  of  the  countries 
concerned to that of the EU. The EIB also supports SMEs and other industrial initiatives, in 
particular  FDI  (Foreign  Direct  Investment),  either  directly  or  through  its  global  loan 
instrument, in particular when involving EU partners. 

In the Mediterranean region, the Bank’s lending under mandate is carried out by the Facility 
for Euro-Mediterranean Investment and  Partnership  (FEMIP)  and  takes  place  mainly  within 
the  framework  of  the  Euro-Mediterranean  Partnership,  in  support  of  the  economic 
development of the countries concerned. EIB lending supports individual investment projects 
and, through the global loan mechanism, smaller projects and SMEs, while at the same time 
strengthening the financial sector in the various countries. 

In addition to its lending under the EuroMed II 2000 -2007 mandate and at the request of the 
Council,  the  Bank  has  continued  with  its  programme  of  lending  from  its  own  resources, 
without budgetary guarantee, under the Mediterranean Partnership Facility. 

EIB own resources lending under mandate is further complemented by interest subsidies (for 
loans  in  the  environmental  sector)  and  by  risk  capital  from  EU  budgetary  sources  and 

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Legal base: Council Decisions 97/256/EC, 98/348/EC, 98/729/EC, 99/786/EC, 2000/24/EC as amended 
by 2000/688/EC, 2000/788/EC, 2001/777/EC and 2001/778/EC. 
A new mandate for EUR 500 million was approved by the Council on 22 December 2004 (2005/48/EC) 
and is now being implemented. 

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managed  by  the  Bank.  This  follows  the  creation  in  2003  of  a  Technical  Assistance  FEMIP 
Support  Fund  which  utilises  funds  granted  by  the  European  Commission  under  the  MEDA 
regulation. 

In 2004, FEMIP was reinforced by the creation of a special envelope to allow for extended 
risk-sharing operations and a  trust fund, modelled on the special  cofinancing funds of other 
International Financial Institutions (IFIs). 

Lending continued under the Turkey Special Action Programme and the available funds have 
now been fully utilised. 

In  Asia  and  Latin  America,  the  Bank  finances  projects  that  are  of  interest  to  both  the 
Community  and  the  countries  concerned  –  cofinancing  with  EU  promoters,  transfer  of 
technology and cooperation in the fields of energy and environmental protection. 

In  the  Republic  of  South  Africa,  the  Bank’s  objective  is  to  contribute  to  the  successful 
implementation of the country’s reconstruction and development programme. 

A  summary  of  the  activity  undertaken  by  the  EIB  since  2000  can  be  found  in  annex  (see 
Table 2.3.1). 

2.3.2.  Lending Activity 

The breakdown by country and by sector can be found in annex (see Section 2.3.2 a-d). 

2.3.3.  Risk Sharing  

Council Decision 2000/24/EC6, as amended, provides Community guarantee global coverage 
for  65%  of  the  overall  amount  of  loans  signed.  Under  the  risk-sharing  arrangements,  EIB 
loans  with  non-sovereign  project  guarantees  are  covered  only  for  political  risk  by  the 
Community  guarantee,  whereas  loans  with  sovereign  project  guarantees  are  covered  for  all 
risks  by  the  Community  guarantee.  The  Bank  would  call  the  Community  guarantee  for  an 
individual loan only if the project guarantee for that loan failed to reimburse the Bank. 

Risk-sharing at 31 December 2004 is shown in annex (see Tables 2.3.3a and b) for the current 
mandates). 

2.3.4.  Cooperation with other Institutions 

In the countries that were candidates for EU membership until enlargement on May 1st 2004 
and  on  a  continuing  basis  in  the  acceding  and  candidate  States,  the  Bank’s  activities  are 
conducted  within  the  framework  of  the  EU  programme  to  help  the  candidate  countries  to 
prepare  for  accession,  in  particular  by  financing  investment  aimed  at  integrating  their 
infrastructure  with  that  of  the  EU  and  by  assisting  SMEs.  Whenever  possible,  projects  are 

6 

Council Decision 2000/24/EC, as amended, invites the Bank “to aim to cover the commercial risk on 
30%  of  its  lending  under  this  Decision  from  non-sovereign  guarantees  as  far  as  possible  on  an 
individual regional mandate basis. This percentage shall be expanded upon whenever possible insofar 
as the market permits”. During 2004, the Bank continued to work towards the risk-sharing objective. 

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cofinanced  with  other  institutions.  The  Bank’s  activities  thus  form  part  of  a  concerted 
approach that is pursued in close cooperation with the Commission and, as appropriate, with 
the international financial institutions working in the countries concerned. 

The Bank cooperates closely with the PHARE/ISPA Programme, with which it has developed 
a  productive  relationship,  much  appreciated  by  the  beneficiary  countries.  In  addition  to 
frequent  PHARE  assistance  during  the  pre-investment  phase  to  ensure  that  the  necessary 
studies  and  technical  assistance  are  implemented  in  support  of  EIB  projects,  the  Bank  also 
cooperates with PHARE in cofinancing infrastructure projects. 

Co-financing  contributions  to  projects  financed  by  the  EIB  in  2004  are  shown  in  annex 
(Tables 2.3.4 to 2.3.6). Additional projects were cofinanced in the framework of the Bank’s 
Pre-Accession Facility, which is outside the scope of this report. 

2.4. 

Signatories of the Lomé/Cotonou Conventions - Lending Activity 

Total EIB lending in the ACP/OCT amounted to EUR 440 million in 2004, of which EUR 62 
million  from  the  Bank’s  own  resources  and  EUR 378  million  from  risk  capital  (see 
Table 2.4)7.  

3. 

BUDGETARY IMPACT OF LENDING 

Lending  activities  have  an  impact  on  the  Union  budget  when  they  are  accompanied  by 
Community  guarantees,  interest  subsidies  or  special  conditions  comparable  to  risk-bearing 
operations for the lender. 

3.1. 

Budget Guarantees 

On 22 December 2004 the Council decided to grant a Community guarantee to the European 
Investment Bank against losses under loans for certain types of projects in Russia, Ukraine, 
Moldova and Belarus (2005/48/EC). The overall ceiling of the credits opened shall be EUR 
500 million and the EIB shall benefit from an exceptional Community guarantee of 100 %. 

On  22  December  2004  the  Council  decided  to  amend  Decision  2000/24/EC  to  take  into 
account  the  enlargement  of  the  European  Union  and  the  European  Neighbourhood  Policy 
(2005/47/EC). 

The new ceilings for each area are as follows (in EUR): 

South-Eastern Neighbours 

Mediterranean countries 

Latin America and Asia 

Republic of South Africa 

Turkey 

9,185 million 

6,520 million 

2,480 million 

825 million 

450 million 

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EIB  Annual  Report  on 
http://www.eib.org 

Investment  Facility  ACP  EU  Cotonou  Partnership  Agreement 

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The  overall  ceiling  for  the  guarantee  is  therefore  EUR 19 460 million,  and  the  Commission 
budget  covers  65%  of  that  amount  (compared  with  70%  under  the  previous  mandate).  The 
new  decision  calls  on  the  EIB  to  seek  other  sources  of  (commercial)  guarantee  from  its 
financial  intermediaries  where  possible  and  sets  a  target  rate  of  30%  of  the  ceiling  (as 
opposed to 25% under the previous mandate). 

This guarantee programme will expire on 31 January 2007; it may automatically be extended 
by six months if the loans ceiling has not been reached. 

The Commission budget covers furthermore 65% of a maximum amount of EUR 600 million 
to Turkey (TERRA) for which no risk-sharing was requested. 

During 2004 (the fifth year of the new mandate) the EIB signed loan agreements for a total of 
EUR 2,844 million,  bringing  total  lending  under  the  new  mandate  to  EUR 13, 620 million 
corresponding  to  70%  of  the  ceiling,  with  risk-sharing  equivalent  to  20.8%  of  the  loans 
signed. 

The  detailed  situation  relating  to  guarantees  is  set  out  in  the  six-monthly  report  by  the 
Commission on guarantees covered by the general budget8. 

3.2. 

Interest Subsidies 

Interest subsidies were granted under a number of Community  programmes both inside and 
outside the Union. At the Council's request, the Commission drew up an overall assessment 
report on this subject9. Most of these programmes have been completed and no longer have 
any impact on budgetary expenditure. In annex, the Table 3.2 lists the programmes which are 
still under way and the amount of interest subsidy paid during the years under review.  

3.3. 

Venture capital 

Under  the  agreements  with  the  Mediterranean  countries  and  the  Lomé  Convention, 
concessionary loans are made by the EIB involving special conditions regarding duration or 
debt  consolidation,  which  enable  them  to  be  treated  as  capital  investments.  The  operations 
carried out in the Mediterranean region are financed by the general budget, and in the ACP by 
the EDF budget. A breakdown of the operations is given in annex (see Table 2.4). 

8 
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COM(2005) 306 and SEC(2005) 915. 
COM(2000) 524 of 6 September 2000. 

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