Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 30 June 2005 {SEC(2005)1769}
Date: 2005-12-23
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.12.2005 
COM(2005)699 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
situation at 30 June 2005 

{SEC(2005)1769} 

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TABLE OF CONTENTS 

Part One: Events since the Report at 31 December 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 31 December 2004.............................................................. 3 

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

Capital outstanding at 30 June 2005 ............................................................................ 4 

Maximum annual risk borne by the Union budget: operations disbursed at 
30 June 2005 (see Table A2 in Annex)........................................................................ 5 

Maximum theoretical annual risk borne by the Union budget: operations disbursed 
and decided at 30 June 2005 (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 2005 ........................................................ 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 31 December 2004, 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  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  European  Investment  Bank  (EIB)  loans2  in  non-
member States). 

2. 

EVENTS SINCE THE REPORT AT 31 DECEMBER 2004 

Regarding  macro-financial  assistance  provided  to  third  countries,  no  new  Council  Decision 
was  adopted.  A  loan  disbursement  of  EUR 15 million  was  carried  out  on  the  basis  of  the 
existing decision in favour of Serbia and Montenegro. 

Disbursements in the form of grants amounted to a total of EUR 22 million: EUR 15 million 
for Bosnia and Herzegovina and EUR 7 million for Tajikistan. 

Regarding Euratom, a loan disbursement of EUR 25 million was carried out on the basis of an 
existing decision in favour of Bulgaria (Kozloduy). Moreover, two loan tranches were paid to 
Romania  (Cernavodă,  EUR 100 million  and  EUR 90 million)  following  a  Commission 
decision3. 

Concerning  the  EIB’s  mandates,  on  22  December  20044,  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 overall ceiling amounts to EUR 500 million. On 
23 May 2005,  the  Commission  decided  that  Russia  and  Ukraine  were  eligible  under  this 
Decision5. 

On  12 April 2005,  the  Commission  adopted  a  Proposal  for  a  Council  Regulation  amending 
Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for external actions6 to 
change the Fund’s provisioning mechanism. The main objective of this proposal is to improve 
the efficiency of the use of budgetary means. According to the proposal, the Fund would be 
provisioned ex-post on the basis of observed amounts of guaranteed loans outstanding. 

1 

2 
3 
4 
5 
6 

Please note that the annex contains a Commission Staff Working Paper with a set of detailed tables and 
explanatory notes to this report. 
The details concerning the EIB Mandates are displayed in Table A1 of the annex. 
C(2004)891/2 of 30 March 2004. 
OJ L 21, 25.01.05, p.11. 
C(2005)1499. 
COM(2005)130. 

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According  to  the  Commission  Communication  on  the  Financial  Perspectives  2007 - 20137, 
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 30 June 2005 

The total risk at 30 June 2005 came to EUR 16,333 million, as against EUR 15,284 million at 
31 December 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 30 June 2005* 

EUR million (rounded)

Amount outstanding at 31 December 2004 

Loan repayments 

Loans disbursed 

  Euratom 
  Macro-financial assistance 
  EIB 

  Euratom 
  Macro-financial assistance 
  EIB 

Exchange rate differences between EUR and other currencies 

Amount outstanding at 30 June 2005 

15,284

0
-38
-561

215
15
1,565

-147

16,333

*  All guaranteed loans (Member States and non-member States), excluding unpaid interests due and 

payment defaults. 

The capital outstanding in respect of operations in the Member States was EUR 3,214 million 
at 30 June 2005, compared with EUR 3,360 million at 31 December 2004. 

The  capital  outstanding  in  respect  of  operations  in  non-member  States  at  30 June 2005  was 
EUR 13,119 million, compared with EUR 11,924 million at 31 December 2004. 

7 

COM(2004) 487 of 14.07.2004. 

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

30 June 2005 (see Table A2 in Annex) 

– 

– 

– 

For  the  second  half  of  2005,  the  total  maximum  annual  risk  amounts  to 
EUR 1,053 million. 

The risk in respect of Member States comes to EUR 265 million. 

The risk in respect of non-member States comes to EUR 789 million. 

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

disbursed and decided at 30 June 2005 (see Table A3 in Annex) 

– 

– 

– 

the  second  half  of  2005, 

For 
EUR 1,103 million  and 
EUR 3,480 million in 2013. 

is  estimated 

the  maximum 

to 
to  reach,  under  certain  assumptions, 

theoretical  risk  amounts 

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 839 million for second half of 2005. 
The risk is estimated to reach EUR 3,253 million by 2013. 

4. 

ACTIVATION OF BUDGET GUARANTEES 

4.1. 

Payments from cash resources 

The Commission draws on its cash resources8 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.9 

During  the  first  half  of  2005,  the  Guarantee  Fund  was  not  called  as  no  default  occurred  on 
such loans. 

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9 

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. 
For more details, see Section 2.5. of the Annex. 

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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 
Perspectives10. 

Table A4 in the Annex 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 13,245 million at 30 June 2005. 

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 due* 

Amount outstanding at 30 June 2005 

1,576 

11,543 

0 

1 

125 

13,245 

* Unpaid interest due within the meaning of the Regulation establishing the Guarantee Fund. 

The ratio between the Fund’s resources and outstanding capital liabilities, within the meaning 
of the Regulation establishing the Fund, was 9.8%, 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 2005 

At  30 June 2005,  the  Guarantee  Fund  amounted  to  EUR  1,298.35  million.  The  following 
movements were recorded in the first half of 2005. 

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

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– 

– 

On  10 January 2005,  an  amount  of  EUR 338,831,402.07  was  repaid  to  the  budget, 
representing 9% of the outstanding operations granted to the new Member States at 
1 May 2004 (EUR 3,764,793,356.32) following Regulation No 2273/200411. 

Net  revenue  of  EUR  25.1  million  from  investment  of  the  Fund’s  assets  as  of 
30 June 2005. 

The total arrears, at 30 June 2005, i.e. penalty interest with the Republic of Argentina, amount 
to USD 1,718,493.12 (EUR equivalent 1,261,649.75). 

7. 

RELATIVE SOLIDITY 

The  ratio  between  the  amount  in  the  Fund  at  30 June 2005  (EUR  1,298.35  million)  and  the 
maximum theoretical annual risk for loans to non-member States in 2005 (EUR 839 million) 
is estimated at 77% (see Annex Table A3)12. 

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JO L 396 of 31.12.2004. 
Please  note  that  the  estimate  for  the  maximum  theoretical  annual  risk  for  the  year  2005  reported  in 
Table  A3  refers  to  the  second  half  of  2005  only.  For  reasons  of  comparability,  this  amount  has  been 
normalised on a period of 12 months 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. Tables on 
the  country  risk  evaluation  are  presented  separately  in  the  Commission  Staff  Working 
Paper13. 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 

The Commission forecast for Bulgaria predicts growth of 6.0% for 2005, driven mainly by 
strong  domestic  demand  resulting  from  expansionary  fiscal  and  wage  policies.  The  current 
account deficit reached 7.4% of GDP in 2004 and is expected to widen to 8.5% in 2005, based 
on continuing strong import growth. FDI inflows reached 8.4% of GDP in 2004 whereas the 
external debt of the country increased slightly to 63.0% of GDP at the end of 2004. 

For 2005-2006, the outlook of the Romanian economy points to sustained economic growth 
of  5-6%  (after  5.3%  in  2004)  and  a  further  widening  of  the  current  account  deficit  that 
reached  7.5%  of  the  GDP  in  2004,  helped  by  large  FDI  inflows  of  7.1%  of  GDP  and  a 
moderate increase in the foreign debt-ratio which reached 37% of GDP. 

Turkey  has  seen  real  GDP  growing  by  8.9%  in  2004.  In  the  first  quarter  of  2005,  growth 
speeded  down  to  4.8  %.  The  Commission  forecast  for  2005  foresees  growth  of  5%,  driven 
mainly by investment and private consumption. The current account deficit reached 5.2% of 
GDP  in  2004  and  is  expected  to  widen  slightly  to  just  below  6%  in  2005,  based  on  higher 
energy  prices  and  increased  import  demand.  FDI  inflows  reached  0.5%  of  GDP  and 
contributed to a decrease of the external debt to 46% of GDP at the end of 2004. 

3. 

WESTERN BALKANS  

The  real  GDP  of  Bosnia  Herzegovina  is  expected  to  grow  by  around  5%,  similar  to  2004. 
The  current  account  deficit  remained  at  23%  of  GDP  in  2004  and  is  expected  to  narrow 
slightly in 2005, based on strong export performance and slower import growth. FDI inflows 
reached  7%  of  GDP  in  2004.  The  external  debt  of  the  country  continued  to  fall  to  30%  of 
GDP  at  the  end  of  2004,  but  total  domestic  debt  is  likely  to  raise  substantially  in  the  near 
future due to a large settlement of claims. 

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SEC(2005)… 

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In the Former Yugoslav Republic of Macedonia growth amounted to 3.7% in the first half 
of the year, thus being in line with the IMF forecast of 3.7% for 2005. Growth accelerated in 
the second quarter mainly due to increased output of the industry and the service sectors. The 
current  account  deficit  reached  7.7%  of  GDP  in  2004  and  is  expected  to  further  narrow  in 
2005,  based  on  exports  increases.  FDI  inflows  reached  2.8%  of  GDP  in  2004.  The  external 
debt of the country fell to 38% of GDP at the end of 2004. 

Serbia and Montenegro’s real GDP grew by 7.2% in 2004 while the IMF forecasts 4.6% in 
2005,  mainly  driven  by  buoyant  domestic  demand  and  an  improving  trade  balance.  The 
current  account  deficit  reached  13%  of  GDP  in  2004  and  is  expected  to  narrow  to  9.5%  in 
2005, based on an improved export performance. FDI inflows reached 4.3% of GDP in 2004. 
The external debt of the country fell to 62% of GDP at end-2004. 

4. 

NEW INDEPENDENT STATES 

In  Armenia,  real  GDP  growth  remained  close  to  10%  in  2004-early  2005  while  the 
government  is  increasing  social  and  capital  expenditure  in  2005  in  line  with  the  poverty 
reduction strategy, budget deficit is projected to stay below 3% of GDP. The current account 
deficit narrowed to 4.7% of GDP in 2004 and the gross international reserves of the Central 
Bank  of  Armenia  are  covering  nearly  four  months  of  imports.  The  public  external  debt 
represents about 29% of GDP in 2005 (down from about 33% in 2004). 

In Georgia, the construction of oil and gas pipelines continues to drive growth but is also the 
cause of a substantial increase in the current account deficit (due to high import demand for 
the construction)  – 11.8% of GDP  in 2005 against 8.1% in 2004 –  In  2005 the government 
has budgeted large increases in expenditure (social programs, defence, infrastructure) which 
will lead to a projected deficit of 4.8% of GDP. The gross international reserves increased in 
2004 to cover nearly two months of imports. Georgia’s public external debt as a ratio to GDP 
was at the end of 2004 equivalent to about 36% (46% in 2003). 

In  2004,  the  GDP  growth  of  Belarus  was  11%  and  is  expected  to  approach  9%  in  2005 
(resulting  in  an  accumulated  real  GDP  growth  of  above  80%  since  1996).  The  General 
Government account turned again to a surplus, reaching 2.7% of GDP by mid-2005, up from 
1.8% in 2004. External debt – mainly short-term – remained modest, with a debt-to-GDP ratio 
below  20%.  Despite  this  improvement,  the  Belarus  economy  remains  vulnerable  in  many 
areas; for instance foreign exchange reserves are very low, at below one month of imports. 

Moldova's  economic  GDP  growth,  which  exceeded  7%  in  2004,  is  expected  to  go  down  to 
6%  in  2005.  Inflation  remains  in  the  double-digit  area.  The  budget  is  likely  to  return  to  a 
surplus in 2005 owing to higher taxes collected on imports. As a result of the exchange rate 
appreciation and of the GDP growth, external debt is expected to represent just one-third of 
GDP at the end of 2005. 

After a record high rate of 12% in 2004, real GDP growth in Ukraine in 2005 is expected to 
be no more than 5.5-6%. The government’s revenue collection targets in the first half of 2005 
were met and therefore the targeted deficit of 2.5% of GDP seems realistic. The  balance of 
payments  is  in  a  comfortable  position  as  the  current  account  is  expected  to  show  a  large 
surplus also in 2005 (7% of GDP, after 10.5% in 2004). In the light of the de facto peg of the 
local  currency  to  the  US  dollar,  this  results  in  a  rapid  accumulation  of  foreign  exchange 
reserves  equivalent  to  3½  months  of  imports.  The  ratio  of  public  external  debt  to  GDP  is 
projected to decrease further in 2005 to about 16% (from about 19% in 2004). 

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Tajikistan’s economy has continued to grow strongly in 2005, despite dampening effects of a 
deteriorating  external  environment.  Real  GDP  growth  of  7%  is  expected  for  the  full  year, 
compared to 10.6% in 2004. For 2005, the fiscal deficit is foreseen to be limited to 0.5% of 
GDP.  Thanks  to  successful  bilateral  debt  agreements  with  Russia  –  Tajikistan’s  largest 
creditor – and Pakistan, external debt has fallen from 66.3% of GDP in 2003 to 41.1% in 2004 
and to a projected 38.4% in 2005. After increasing to 4% of GDP in 2004, the current account 
deficit has widened further in the first quarter of 2005, this being driven by a large increase in 
the trade deficit. 

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