Report from the Commission to the budgetary authority on guarantees covered by the general budget situation at 31 December 2005 {SEC(2006) 1071}
Date: 2006-08-10
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.8.2006 
COM(2006) 452 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
situation at 31 December 2005 

{SEC(2006) 1071} 

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TABLE OF CONTENTS 

Part One: Events since the Report at 30 June 2005, 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 2005 ....................................................................... 3 

Risk situation................................................................................................................ 3 

Capital outstanding at 31 December 2005 ................................................................... 3 

Maximum annual risk borne by the Union budget: operations disbursed at 
31 December 2005 (see Table A2 in Annex)............................................................... 4 

Maximum theoretical annual risk borne by the Union budget: operations disbursed 
and decided at 31 December 2005 (see Table A3 in Annex)....................................... 4 

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....................................................................................................... 5 

Situation of the Guarantee Fund at 31 December 2005 ............................................... 6 

Relative solidity ........................................................................................................... 6 

Part Two: Evaluation of risks: Economic and financial situation of the non-member countries 
benefiting from the most important loan operations .................................................................. 7 

1. 

2. 

3. 

4. 

Introduction.................................................................................................................. 7 

Candidate countries...................................................................................................... 7 

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

New Independent States............................................................................................... 8 

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Part One: Events since the Report at 30 June 2005, 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 30 JUNE 2005 

Regarding  macro-financial  assistance  provided  to  third  countries,  no  new  Council  Decision 
was adopted and no further loan disbursement occurred in the second half of 2005. 

Disbursements in the form of grants amounted to a total of EUR 29.5 million: EUR 3 million 
for Albania, EUR 1.5 million for Armenia and EUR 25 million for Serbia and Montenegro. 

Regarding Euratom, no loan disbursement was carried out on the basis of existing decisions. 

According  to  the  Commission  Communication  on  the  Financial  Perspectives  2007 - 20133, 
the amount of financing of the Guarantee Fund will not be explicitly 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 2005 

The  total  risk  at  31 December 2005  came  to  EUR  16,521  million,  as  against  EUR  16,333 
million at 30 June 2005. 

1 

2 
3 

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. 
COM(2004) 487 of 14.07.2004. 

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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 2005* 

EUR million (rounded)

Amount outstanding at 30 June 2005 

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 31 December 2005 

16,333

0
-111
-1,243

0
0
1,580

-38

16,521

*  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 2,966 million 
at 31 December 2005, compared with EUR 3,214 million at 30 June 2005. 

The capital outstanding in respect of operations in non-member States at 31 December 2005 
was EUR 13,554 million, compared with EUR 13,119 million at 30 June 2005. 

3.2.  Maximum  annual  risk4  borne  by  the  Union  budget:  operations  disbursed  at 

31 December 2005 (see Table A2 in Annex)  

– 

– 

– 

For 2006, the total maximum annual risk amounts to EUR 2,139 million. 

The risk in respect of Member States comes to EUR 617 million. 

The risk in respect of non-member States comes to EUR 1,522 million. 

3.3.  Maximum  theoretical  annual  risk5  borne  by  the  Union  budget:  operations 
disbursed and decided at 31 December 2005 (see Table A3 in Annex) 6 

– 

4 
5 
6 

For  2006,  the  maximum  theoretical  risk  amounts  to  EUR 2,213 million  and  is 
estimated to reach, under certain assumptions, EUR 2,782 million in 2014. 

The technical term "maximum annual risk" is explained under point 1 in the Annex. 
The technical term "maximum theoretical annual risk" is explained under point 1 in the Annex. 
The  maximum  annual  risk  takes  into  account  the  amounts  of  loans  remaining  to be  disbursed  for  the 
current financial perspectives as the new EIB Mandate 2007 to 2013 has not yet been decided. 

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– 

– 

The maximum theoretical risk in respect of Member States remains almost stable at 
EUR 618 million in 2006. 

For the non-member States it amounts to EUR 1,594 million. The risk is estimated to 
reach EUR 2,604 million by 2014. 

4. 

ACTIVATION OF BUDGET GUARANTEES 

4.1. 

Payments from cash resources 

The Commission draws on its cash resources7 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  (third 
countries) 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.8 

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

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 
Perspectives9. 

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 13,680 million at 31 December 2005. 

7 

8 
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. 
The annual figure entered in the 2000-2006 Financial Perspectives is EUR 200 million at 1999 prices; 
in 2005, the amount was EUR 223 million. 

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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, EIB 

3. Unpaid interest due1 

Amount outstanding2 at 31 December 2005 

1,465 

12,089 

126 

13,680 

1 

2 

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

Payments Defaults and Default Interest are not included in the outstanding amount to be covered by the 
Fund and are reported separately in Section 6. 

The ratio between the Fund’s resources and outstanding capital liabilities, within the meaning 
of the Regulation establishing the Fund, was 9.7%, 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 2005 

At  31 December 2005,  the  Guarantee  Fund  amounted  to  EUR  1,323.94  million.  The 
following movements were recorded in the second half of 2005. 

– 

– 

– 

The first transfer into the Fund of EUR 140.11 million. 

The Fund’s surplus of the year 2004 of EUR 187.13 million back to Union budget in 
2005. 

Net  revenue  of  EUR  25.6  million  from  investment  of  the  Fund’s  assets  as  of 
31 December 2005. 

No recovery occurred in the second half of 2005. 

The total arrears, at 31 December 2005, i.e. penalties interests with the Republic of Argentina, 
amount to USD 1,718,493.12, thereof, USD 1,448,433.44 (EUR equivalent 1,227,798.12) are 
still to be recovered by the Fund. The balance is due to the EIB. 

7. 

RELATIVE SOLIDITY 

The ratio between the amount in the Fund at 31 December 2005 (EUR 1,323.94 million) and 
the  maximum 
in  2006 
theoretical  annual  risk  for 
(EUR 1,590 million) is estimated at 83% (see Annex Table A3). 

to  non-member  States 

loans 

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Part Two: Evaluation of 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, the quality of the risks which depend on the type of operation and 
the standing of the borrower should also be assessed. Tables on the country risk evaluation are 
presented  separately  in  the  Commission  Staff  Working  Paper10.  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 

Bulgaria  has  experienced  a  very  strong  expansion  in  the  first  half  of  2005  followed  by  a 
considerable  slow  down  in  the  third  quarter.  Real  GDP  growth  reached  5.5%  for  the  whole 
year. The deceleration was largely due to the  heavy  floods  during  the  summer  months.  The 
current  account  deficit  increased  to  11.8%  of  GDP.  Net  FDI  inflows  remained  strong,  but 
unlike in previous years, FDI inflows fell short of fully financing the current account deficit in 
2005 and covered only about 75%. 

In 2005, the real GDP growth of Romania growth slowed to 4.1% mainly due to the negative 
impact of massive floods and structural changes affecting the industrial activity. The current 
account  deficit  marginally  widened  to  8.7%  of  GDP  in  2005  from  8.4%  in  2004  of  which 
more  than  85%  was  covered  by  net  FDI  and  portfolio  investments.  In  2005,  external  debt 
inched up by only 2 % points to 34.5% of GDP. 

Real GDP of Turkey grew by 7.4% in 2005 following an increase of 8.9% in 2004. The main 
sources of growth have been investment and private consumption. The current account deficit 
widened  less  than  anticipated  from  5.1%  in  2004  to  5.8%  of  GDP  in  2005.  Public  finances 
performed  favourably,  benefiting  from  strong  growth  and  low  wage  growth  in  the  public 
sector.  The  general  government  deficit  (fiscal  notification  2006,  using  ESA  95)  fell  from 
11.3%  of  GDP  in  2003  to  5.7%  of  GDP  in  2004  and  1.2%  in  2005  (or  about  2%  in  GFS 
terms). 

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SEC(2006) 1071 

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3. 

WESTERN BALKANS  

GDP  growth  of  Albania  remained  high  at  5.5%  in  2005.  Large  imbalances  persist  in  the 
external sector. While the trade deficit is estimated to have remained above 23% of GDP in 
2005, substantial private transfers from abroad have contributed to finance a current account 
deficit  of  an  estimated  7.0%  of  GDP.  Some  progress  was  achieved  in  the  management  of 
public expenditures and revenues; nevertheless the strengthening of the tax administration and 
public sector governance remain among the key challenges for the new government. 

Bosnia and Herzegovina maintained a stable macroeconomic environment in 2005, with the 
economy growing at  around  5%  as  in  2004. Structural reforms continued to be  rather  slow, 
although some achievements were noted in the fields of indirect taxation and privatisation. In 
the absence of official statistical data the current account deficit can be estimated at 23% of 
GDP. 

Economic  growth  of  The  Former  Yugoslav  Republic  of  Macedonia  remained  strong.  In 
2005, real GDP growth was 4.0%, largely unchanged from 4.1% in 2004. The current account 
improved significantly during 2005, with a decline in the deficit from nearly 8% of GDP in 
2004 to about 1½% in 2005. About half of the improvement is due to higher exports. At the 
end of December 2005, official reserve assets of the National Bank stood at a level of EUR 
1.1 billion, equivalent to slightly less than approximately 4 months of 2005 imports of goods 
and services. End-December gross external debt stood at some 38 % of GDP. 

The economic performance of Serbia  and  Montenegro has been robust in 2005, driven  by 
strong  gains  in  trade,  transportation,  financial  services  and  construction.  GDP  in  Serbia  is 
estimated to have grown by 6.5% year-on-year for the whole year and in Montenegro by 3.8% 
in  the  first  nine  months  of  2005.  The  current  account  deficit  is  estimated  at  8.5%  of  GDP. 
Strong  FDI  inflows  have  somewhat  eased  financing  requirements.  In  both  Republics,  the 
reform momentum has again been strong in 2005 and in Serbia, the share of the private sector 
is  estimated  to  have  increased  to  55%  of  GDP,  as  a  result  of  progress  in  privatisation  and 
restructuring of enterprises. 

4. 

NEW INDEPENDENT STATES 

Georgia’s  economic  growth  accelerated  in  2005  to  around  8%  (6.2%  in  2004)  owing  to 
strong  performance  of  both  industry  and  agriculture.  The  privatisation  process  took  off  last 
year, bringing revenues equivalent to approximately 3% of GDP. The current account deficit 
is estimated to have widened to about 10% of GDP (7.6% in 2004) owing to large inflows of 
capital goods for oil/gas pipeline and other infrastructure investment. The deficit was largely 
financed by inflows of foreign direct investment. Georgia’s external debt decreased slightly in 
nominal terms to USD 1.8 billion at the end of 2005, while as a ratio to GDP the external debt 
is estimated to have decreased from 36% (2004) to about 30% (2005). 

In Ukraine, a negative terms of trade shock (import prices of energy increasing while world 
market  prices  on  metal  exports  tumbled)  combined  with  sluggish  investment  under  an 
uncertain government policy environment led to a hard landing, with a real GDP growth rate 
of  2.4%  in  2005  (12.1%  in  2004).  Ukraine’s  public  external  debt  of  USD  13  billion  is, 
however, at a sustainable level of about 16 percent of GDP. The international reserves of the 
National  Bank  of  Ukraine  doubled  in  2005  mainly  as  result  of  privatisation-related  capital 
inflows  in  the  last  quarter  of  2005.  The  political  uncertainties  continued  until  March  2006 

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parliamentary elections. The rating agencies, however, maintained Ukraine’s sovereign rating 
at BB (with stable outlook) supported by low government debt and good external liquidity. 

Moldova's  GDP  growth  exceeded  again  7%  in  2005  reflecting  strong  domestic  demand 
boosted by booming remittances. The current account deficit widened to 7% of GDP in 2005 
even  if  most  of  the  growing  trade  deficit  is  covered  by  equally  growing  remittances.  The 
budget  surplus  increased  in  2005  owing  to  higher  taxes  collected  on  imports.  In  2006  the 
budget  may  well  turn  to  a  deficit  reflecting  higher  spending  for  social  programmes  and  the 
expected settlement of Moldova's debt to the Paris Club creditors. Already in 2005, as a result 
of the exchange rate appreciation and of the GDP growth, the stock of the public and publicly 
guaranteed external debt went down to just one-quarter of GDP. The international reserves of 
the National Bank of Moldova have increased to represent more than two months of imports. 

The economy of Tajikistan has continued to grow strongly in 2005, recording 7.5% real GDP 
growth,  compared  to  10.6%  in  2004.  The  government  budget  surplus  has  been  estimated  at 
0.1%  in  2005  (a  surplus  has  been  recorded  for  the  third  consecutive  year).  Thanks  to  the 
successful bilateral debt agreement with Russia – Tajikistan’s largest creditor – external debt 
has  fallen  to  less  than  40%  of  GDP  in  2005.  As  a  result,  the  current  account  deficit  is 
estimated to  have  narrowed from 4% of GDP in 2004 to 3.6%  in 2005.  Import coverage of 
gross official reserves has improved slightly from 1.8 months in 2004 to 1.9 months by end-
2005. 

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