Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 30 June 2006 {SEC(2007) 241}
Date: 2007-02-23
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.2.2007 
COM(2007) 66 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
situation at 30 June 2006 

{SEC(2007) 241} 

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TABLE OF CONTENTS 

Part One: Events since the Report at 31 December 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 31 December 2005.............................................................. 3 

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

Capital outstanding at 30 June 2006 ............................................................................ 4 

Maximum annual risk borne by the Union budget: operations disbursed at 
30 June 2006 (see Table A2 in Annex)........................................................................ 5 

Maximum theoretical annual risk borne by the Union budget: operations disbursed 
and decided at 30 June 2006 (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 2006 ........................................................ 6 

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

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

1. 

2. 

3. 

4. 

5. 

6. 

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

Acceding countries....................................................................................................... 8 

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

Potential candidate countries........................................................................................ 9 

New Independent States............................................................................................. 10 

Other non-member countries...................................................................................... 10 

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Part One: Events since the Report at 31 December 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, i.e. 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). Current risks on Member States result 
from loans disbursed prior to accession. 

2. 

EVENTS SINCE THE REPORT AT 31 DECEMBER 2005 

Regarding macro-financial assistance provided to third countries in the form of loans, no new 
Council  Decision  was  adopted.  On  the  basis  of  existing  decisions,  a  loan  disbursement  of 
EUR 10 million  was  carried  out  in  favour  of  Bosnia  and  Herzegovina,  followed  by  a  loan 
disbursement of EUR 9 million to Albania. 

There was no disbursement in the form of grants during the first half of 2006. 

Regarding  Euratom,  a  loan  disbursement  of  EUR 17.5 million  in  favour  of  Bulgaria 
(Kozloduy)  and  a  loan  disbursement  of  EUR 33.5 million  to  Romania  (Cernavodă)  were 
carried out on the basis of existing decisions which are now used up. 

Concerning  the  EIB  current  mandate,  the  Council  decided  on  27 February 20063  to  amend 
Decision 2000/24 in order to include the Maldives in the list of countries covered, following 
the Indian Ocean tsunamis of December 2004. Furthermore on 22 June 2006, the Commission 
issued a proposal4 for a new EIB external mandate 2007-2013. 

Under  the  new  Financial  Framework,  the  European  Parliament,  the  Council  and  the 
Commission  adopted  an  Interinstitutional  Agreement  on  budgetary  discipline  and  sound 
financial management5 that will enter into force on 1 January 2007. Consequently, 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  (EU  as  a 
global player) and not, as at present, through a dedicated Reserve. However, in the absence of 
this Reserve, the substantial elements of budgetary discipline will still be in place: the EIB's 
external lending mandate will be limited over the 2007 to 2013 period (this Council Decision 
will represent around 90% of the overall loan volume), Macro-Financial Assistance loans are 

1 

2 
3 
4 
5 

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. 
OJ L 62, 03.03.06, p.26. 
COM (2006) 324 final, 22.06.2006. 
OJ C 139, 14.06.06, p.1. 

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subject  to  individual  decisions  by  the  Council  and  the  Euratom  lending  has  a  ceiling  of 
EUR 4 billion (which has already been used to a large extent). 

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 the Annex Tables A1, A2 and A3 respectively. 

3.1. 

Capital outstanding at 30 June 2006 

The total risk at 30 June 2006 came to EUR 16,089 million, as against EUR 16,521 million at 
31 December 2005. 

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 2006* 

EUR million (rounded)

Amount outstanding at 31 December 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 30 June 2006 

16,521

0
-31
-1,051

51
19
1,017

-437

16,089

*  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 2,801 million 
at 30 June 2006, compared with EUR 2,966 million at 31 December 2005. 

The  capital  outstanding  in  respect  of  operations  in  non-member  States  at  30 June 2006  was 
EUR 13,288 million, compared with EUR 13,554 million at 31 December 2005. 

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3.2.  Maximum  annual  risk6  borne  by  the  Union  budget:  operations  disbursed  at 

30 June 2006 (see Table A2 in Annex)  

– 

– 

– 

For  the  second  half  of  2006,  the  total  maximum  annual  risk  amounts  to 
EUR 1,258 million. 

The risk in respect of Member States comes to EUR 397 million. 

The risk in respect of non-member States comes to EUR 861 million. 

3.3.  Maximum  theoretical  annual  risk7  borne  by  the  Union  budget:  operations 

disbursed and decided at 30 June 2006 (see Table A3 in Annex) 8 

– 

– 

– 

the  second  half  of  2006, 

For 
EUR 1,323 million  and 
EUR 2,664 million in 2014. 

is  estimated 

the  maximum 

to 
to  reach,  under  certain  assumptions, 

theoretical  risk  amounts 

The maximum theoretical risk in respect of Member States is EUR 397 million in the 
second half of 2006. The risk is estimated to decrease at EUR 168 million by 2014. 

For  the  non-member  States  it  amounts  to  EUR 926 million  for  the  second  half  of 
2006. The risk is estimated to reach EUR 2,496 million by 2014. 

4. 

ACTIVATION OF BUDGET GUARANTEES 

4.1. 

Payments from cash resources 

The Commission draws on its cash resources9 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.10 

During  the  first  half  of  2006,  the  Guarantee  Fund  was  not  called  as  no  default  occurred  on 
such loans. 

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7 
8 

9 

10 

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. 
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 
Perspectives11. 

Table A4 in the Annex shows an estimate of the Community's lending capacity in respect of 
non-member States in 2006 in line with the current Guarantee Fund Regulation. 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 13,421 million at 30 June 2006. 

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 30 June 2006 

1,504 

11,784 

133 

13,421 

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 9.85%, 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 2006 

At  30 June 2006,  the  Guarantee  Fund  amounted  to  EUR  1,321.33  million.  The  following 
movements were recorded in the first half of 2006. 

– 

11 

Net  revenue  of  EUR 24.8 million  from  investment  of  the  Fund’s  assets  as  of 
30 June 2006. 

The annual figure entered in the 2000-2006 Financial Perspectives is EUR 200 million at 1999 prices; 
in 2006, the amount was EUR 229 million. 

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No recovery occurred in the first half of 2006. 

The  total  arrears,  at  30 June 2006,  i.e.  penalties  interests  with  the  Republic  of  Argentina, 
amount to USD 1,718,493.12, thereof, USD 1,448,433.44 (EUR equivalent 1,139.332,53) 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  30 June 2006  (EUR  1,321.33 million)  and  the 
maximum theoretical annual risk for loans to non-member States in 2006 (EUR 926 million) 
is estimated at 71% (see Annex Table A3) 12. 

12 

Please  note  that  the  estimate  for  the  maximum  theoretical  annual  risk  for  the  year  2006  reported  in 
Table  A3  refers  to  the  second  half  of  2006  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 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  Paper13.  A  brief  summary  of  this 
analysis is provided below. 

2. 

ACCEDING COUNTRIES 

In  the  first  half  of  2006,  real  GDP  growth  in  Bulgaria  accelerated  to  6.1%  (from  5.5%  in 
2005). This was mainly driven by very strong gross fixed capital formation, which grew by 
over 20%, and by continued strong private consumption growth. The current account deficit 
widened further to 13.9% of GDP primarily because of a lower surplus in the services balance 
and lower current transfers from abroad. Growth of merchandise exports outpaced imports in 
the first half of 2006, which was, however, insufficient to prevent a slight further increase in 
the trade deficit. As in 2005, the current account deficit was almost completely covered by net 
FDI inflows. 

For Romania, real GDP growth rebounded strongly by 7.4% in the first half of 2006, after a 
deceleration  to  4.1%  in  2005,  mainly  due  to  the  negative  impact  of  widespread  floods  and 
structural  changes  affecting  industrial  activity.  Economic  growth  was  fairly  balanced  in  the 
first  semester  of  2006,  being  driven  by  both  household  consumption  growth  of  11.8%  and 
investment growth of 11.9%. The disinflation process in 2006 was more rapid than expected 
and the year-on-year increase in CPI came down to 5.5% in September from 8.6% at the end 
of 2005. Over the course of 2006, the current account deficit continued to widen from 8.7% of 
GDP reported in 2005 to around 9.6% in July 2006, largely driven by substantial FDI inflows 
(covering more than 70% of the deficit), private sector borrowing and portfolio investments. 
The external debt of  the  country  grew  by around EUR 5 bn in the first  half of 2006  due in 
particular  to  the  short-term  private  external  debt  growing  rapidly,  but  declined  slightly  to 
around 37% of GDP. 

3. 

CANDIDATE COUNTRIES 

For Turkey, real annual GDP growth amounted to 7% in the first half of 2006, as compared 
to  7.4%  in  2005.  Growth  is  expected  to  range  between  5-6%  in  2006.  The  current  account 
deficit reached 6.2% of GDP in 2005 and is expected to stabilize in 2006, in large part as a 
result  of  improved  price  and  cost  competitiveness  following  the  depreciation  of  the  lira  in 

13 

SEC(2007) 241 

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May-June 2006. Gross FDI inflows reached 3% of GDP in 2005 and in the first half of 2006, 
thereby financing about half of the current account deficit. The external debt of the country 
amounted to roughly 40% of GDP at the end of 2005. 

For the former Yugoslav Republic of Macedonia, GDP growth decelerated to 2.6% (in real 
terms) in the first half of 2006, compared to 3.8% during the same period a year ago. Main 
factors  for  this  slowdown  were  weaker  industrial  production  and  construction.  However, 
leading indicators point to a marked acceleration of industrial output during the third quarter 
of 2006, which could bring overall GDP growth in 2006 to close to 4%. The current account 
deficit improved significantly in 2005, when a better trade performance and stronger inflows 
of  workers  remittances  reduced  the  deficit  from  7.7%  of  GDP  in  2004  to  1.4%  of  GDP  in 
2005. In 2006, a widening to 2-3% of GDP is expected. Gross FDI inflows amounted to 1.7% 
of GDP in 2005, but rose sharply to about 6% of GDP during the first half of 2006, resulting 
from a substantial privatisation related FDI inflow. The external debt of the country amounted 
to 47% of GDP at the end of 2005. 

4. 

POTENTIAL CANDIDATE COUNTRIES 

In  Albania,  annual  GDP  growth  amounted  to  5.5%  (in  real  terms)  in  2005.  The  current 
account deficit (including official transfers) reached 6.9% of GDP in 2005. The trade deficit 
stood at 24.1% of GDP in 2005 and during the first five months of 2006, it widened further by 
18% on an annual basis). Gross FDI inflows reached 3.1% of GDP in 2005 and the external 
debt of the country amounted to 17.6% of GDP at the end of 2005. Total public debt declined 
to 55.3% of GDP in 2005. 

In Bosnia and Herzegovina, annual GDP growth amounted to around 5.5% (in real terms) in 
2005. Growth is expected to remain around 5% in 2006. The current account deficit widened 
to 22.5% of  GDP in  2005,  partly reflecting effects of VAT introduction on import flows. It 
narrowed again in the first half of 2006 and is expected to be around 20% at year end. Gross 
FDI inflows reached 3.2% of GDP in 2005. Public external debt of the country amounted to 
30% of GDP at the end of 2005, while private external debt was estimated to also amount to 
around 30% of GDP. 

In Serbia, annual GDP growth amounted to 6.3% (in real terms) in 2005. Growth continued 
at 6.3% in the first quarter of 2006. The current account deficit reached 9.8% of GDP in 2005. 
It widened further in the course  of 2006. Gross FDI  inflows  reached  6.1% of GDP  in 2005 
and the external debt of the country amounted to 66% of GDP at end-July 2006. Public debt 
has  declined  following  the  EUR 600 million  Paris  Club  debt  write-off,  which  was  linked  to 
the successful completion of the recent IMF programme in February 2006. 

In  Montenegro,  annual  GDP  growth  amounted  to  4.1%  (in  real  terms)  in  2005.  Growth 
accelerated to 6.5% in the first semester of 2006. The current account deficit reached 12.2% 
of GDP in 2005. It further widened in the course of 2006. Gross FDI inflows reached 22.8% 
of GDP in 2005 and the external debt of the country amounted to 42.6% of GDP at the end of 
2005. In July 2006 Montenegro reached an agreement with Serbia on the division of financial 
rights  and  obligations  following  the  dissolution  of  the  former  state  union.  The  agreement 
confirmed the previous estimates of the debt levels. 

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5. 

NEW INDEPENDENT STATES 

In  Georgia,  despite  the  external  shocks,  economic  growth  still  appears  relatively  resilient 
after very strong growth of 9.3% in 2005, inflation peaked at 14.5% in mid-2006 and the main 
economic  policy  challenge  is  to  bring  inflation  back  to  single  digits.  The  trade  balance 
deteriorated and can be projected at 19% of GDP (14.6% in 2005). Growing remittances and 
official transfers cushion the impact on the current account which nonetheless is expected to 
have  a  deficit  of  10%  of  GDP  this  year  (5.4%  in  2005).  Thanks  to  strong  economic 
performance Georgia's external public debt has been rapidly reduced to around 23% of GDP 
(27% in 2005). 

In  Ukraine,  the  economy  appears  to  have  adjusted  quickly  to  the  increase  in  oil  and  gas 
import prices and a rebound in growth was seen in the first half of 2006 (5.5% year-on-year 
against  2.6%  in  2005  as  a  whole).  The  current  account  has  turned  negative,  also  related  to 
concomitant  market  developments  in  steel,  Ukraine's  main  export.  Ukraine's  public  external 
debt has declined to 12.5% of GDP (15.3% in 2005), while the private sector's better access to 
foreign capital markets keeps the total external debt at around 45% of GDP. Higher producer 
prices have not yet impacted consumer prices, which fell back to single digits in mid-2006. In 
August, Standard & Poor's confirmed, however, Ukraine's sovereign long-term credit rating at 
BB-, supported by the low level of indebtedness in particular. 

Moldova's  GDP  growth  that  had  exceeded  7%  in  2005  is  expected  to  slow  down  to  3%  in 
2006.  This  is  the  result  of  the  strong  external  shocks  faced  by  Moldova's  economy  –  the 
doubling  of  the  price  of  the  natural  gas  imports  from  Russia  and  the  ban  imposed  on 
Moldova's wine exports. In 2006, the trade and current account deficits are expected to exceed 
respectively 50% and 10% of GDP. Also, inflation is expected to rebound to more than 12% 
this year. The deterioration of Moldova's external economic environment comes at a moment 
the country has finally succeeded in restructuring its Paris Club debt and is set to gradually 
cut down its external indebtedness. 

Tajikistan’s  economy  has  continued  to  grow  strongly  in  2005-2006  by  7%  to  8%.  The 
government budget that was in surplus for three consecutive years (2003-2005) is expected to 
register  a  moderate  deficit  in  2006.  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.  A  deteriorating  trade  deficit  (from  7%  of  GDP  in  2004  and  12%  in  2005  to  the 
projected more than 16% in 2006) is largely offset by a rapid growth in foreign remittances. 
As a result, the current account deficit is expected to increase moderately in 2006 (from 3.6% 
in 2005 to about 4.5%). Import coverage of gross official reserves remains relatively low, at 
slightly  less  than  two  months  of  imports.  The  IMF  PRGF  arrangement  was  successfully 
completed  in  early  2006.  The  authorities  have  started  the  preparation  of  a  successor 
arrangement. 

6. 

OTHER NON-MEMBER COUNTRIES 

Algeria experienced a major political break in 2005 as President Bouteflika moved to bring 
the  “national  tragedy”  of  the  1990s  to  a  close  stressing  the  need  to  economic  development. 
Record  oil  prices  have  meant  unprecedented  stability  and  prosperity  for  the  Algerian 
economy,  as  well  as  a  golden  opportunity  for  reform.  The  government’s  $60bn  spending 
programme targeting infrastructure, housing, education and jobs training should help to make 
long-term  growth  sustainable.  However,  despite  the  liberalisation  of  the  banking  sector  in 

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1990s,  the  Algerian  financial  market  remains  significantly  underdeveloped.  Moreover,  with 
only  three  stocks  traded  and  a  market  capitalisation  of  $1.4bn,  the  Algiers  Stock  Exchange 
remains  something  of  a  fledgling  market.  With  accession  to  the  World  Trade  Organisation 
(WTO) on the horizon and the EU Association Agreement now in force, Algeria has clearly 
signalled  its  move  to  free  markets  and  free  trade.  The  major  challenge  for  the  country  now 
appears to be consolidating and speeding up the process of reform started in recent years. 

Jordan’s  economy  continues  to  grow  strongly  in  2006,  with  real  GDP  growth  in  the  first 
quarter of 2006 at 6.7%. The unemployment rate remains high (reaching 15.7% in 2005). The 
inflation  rate  is  expected  to  pick  up  in  2006  to  6.3%  (2005:  3.8%).  The  authorities  have 
intensified fiscal adjustment in 2005 and 2006 to bring the budget deficit (excl. grants) down 
to 6.6% of GDP from 10.1% in 2005. External current account deficit (incl. grants) for 2006 
is expected to increase from 18.2% in 2005 to 20.7% of GDP (and compared to a surplus of 
11.6%  in  2003).  Although  merchandise  export  growth  remained  robust,  the  trade  deficit 
widened  to  38.8%  of  GDP  in  2005  (2004:  29.6%)  on  account  of  an  important  increase  in 
imports  reflecting  strong  domestic  demand  growth,  higher  oil  prices  and  the  high  import 
content  of  exports.  The  current  account  deficit  continued  to  be  financed  by  capital  inflows, 
including  foreign  direct  investments,  remittances  and  portfolio  inflows  primarily  from  the 
region. At the same time, the real effective exchange rate is expected to appreciate after years 
of depreciation.  

Brazilian's growth is expected at 3.5% in 2006 and inflation has declined to its lowest level 
since  the  adoption  of  the  inflation  targeting  regime.  Buoyant  export  growth  and  rising 
commodity  prices  have  allowed  the  country  to  run  an  important  current  account  surplus 
(projected at 1.1% of GDP in 2006). The external debt-over-GDP ratio has decreased and is 
projected  to  further  decline  to  21.1%  by  the  end  of  2006.  Efforts  to  reduce  public  external 
indebtedness are paying off: Brazil's sovereign credit has been upgraded by two of the leading 
credit-rating  agencies  since  February  2006,  and  interest  premia  are  at  historically  at  low 
levels.  Significant  external  vulnerabilities  remain,  however,  despite  recent  progress  with 
public debt management. Public debt remains above 50%,  is highly exposed to interest rate 
variations with a relatively short average maturity.  

The Argentinean economy is expected to expand by 9.2% in 2005. Inflation at end-2007 is 
expected to reach 12%. The strength of the economy has led to a significant improvement in 
public finances, with the primary surplus expected to reach about 4.5% of GDP in 2005. The 
banking  sector  is  recovering  gradually  but  is  still  weak.  Uncertainties  concerning  the  legal 
framework and the government policy for the public utilities have persisted and continue to 
have detrimental effects on the confidence of foreign investors. In addition, the fact that the 
country no longer needs to turn to the IMF after fully repaying all its IMF debt in December 
2005  do  not  appear  conductive  to  progress  on  structural  reforms  to  address  long-term 
vulnerabilities.  Argentina  remains  in  arrears  to  the  EIB,  having  failed  to  pay  the  penalty 
interest  (USD1.7  million)  steaming  from  the  arrears  that  the  state  run  in  the  wake  of  the 
Argentinean financial crisis. 

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