Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 30 June 2008 {SEC(2009) 159}
Date: 2009-02-18
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), investment protection, report, third country

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 18.2.2009 
COM(2009) 68 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 30 June 2008 

{SEC(2009) 159} 

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REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 30 June 2008 

{SEC(2009) 159} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

5.3. 

6. 

6.1. 

6.2. 

6.3. 

Introduction and types of covered operations .............................................................. 4 

Events since the last report at 31 December 2007 ....................................................... 4 

Data on risks covered by the Budget ........................................................................... 5 

Definition of risk .......................................................................................................... 5 

Risk linked to Member States ...................................................................................... 6 

Risk linked to third countries ....................................................................................... 7 

Global risk covered by the Budget............................................................................... 8 

Evolution of risk........................................................................................................... 8 

Defaults, activation of Budget guarantees and arrears................................................. 9 

Payments from cash resources ..................................................................................... 9 

Payments from the Budget ......................................................................................... 10 

Activation of the Guarantee Fund for external actions .............................................. 10 

Guarantee Fund for external actions .......................................................................... 10 

Recoveries .................................................................................................................. 10 

Assets ......................................................................................................................... 10 

Target amount ............................................................................................................ 10 

Evaluation of risks: Economic and financial situation of third countries benefiting 
from the most important EU loan operations............................................................. 11 

Introduction ................................................................................................................ 11 

Candidate countries.................................................................................................... 11 

Potential candidate countries...................................................................................... 12 

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1. 

INTRODUCTION AND TYPES OF COVERED OPERATIONS 

This  report  is  submitted  pursuant  to  Article  130  of  the  Financial  Regulation  which  requires 
the  Commission  to  report  to  the  European  Parliament  and  to  the  Council  twice  a  year  on 
budgetary  guarantees  and  the  corresponding  risks1.  It  is  completed  by  a  Commission  Staff 
Working Document with a set of detailed tables and explanatory notes (the "Annex")2. 

The risks covered by the budget of the European Union (the "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 assistance3 ("MFA") loans to third countries and in conjunction with the Bretton 
Woods  institutions,  balance-of-payments  loans  granting  support  to  non-EMU  Member 
States grappling with transitional difficulties; and 

–  loans  with  microeconomic  objectives  (Euratom  loans  and  most  importantly  European 
Investment Bank ("EIB") external financing4). These operations have been covered since 
1994 by the Guarantee Fund for external financing ("the Fund")5 which was set up, among 
other things, to limit the budgetary impact stemming from calls on guarantees given by the 
Budget for lending operations in third countries (if a country has become a Member State 
the  risk  is  directly  born  by  the  Budget).  If  there  are  insufficient  resources  in  the  Fund, 
recourse will be made to the Budget. 

The Council Regulation establishing the Fund (the "Fund Regulation"6), which was adopted 
in  1994,  was  first  amended  in  1999.  Following  a  second  amendment  of  the  Council 
Regulation  in  2004,  the  Fund's  coverage  is  withdrawn  if  third  countries  become  Member 
States.  The  Budget  directly  covers  loans  to  Member  States  granted  or  guaranteed  by  the 
Community. 

2. 

EVENTS SINCE THE LAST REPORT AT 31 DECEMBER 2007 

There were no disbursements under macro financial assistance and Euratom loans during the 
first half of 2008.  
A new disbursement of USD 22 million Euratom loan took place in October 2008. 

Regarding EIB financing operations, a total amount of EUR 1 884 million had been signed by 
the EIB under the general mandate 2007-2013 (Council Decision 2006/1016/EC). Concerning 
the disbursement volume, an amount of EUR 911 million was disbursed of which EUR 286 
million was disbursed under the new general mandate 2007-2013. 

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COM(2008)451  and  SEC(2008)2249  make  up  the  previous  report  on  the  guarantees  covered  by  the 
Budget at 31 December 2007. 
SEC(2008)[…]. 
MFA  may  also  take  the  form  of  grants  to  third  countries.  For  more  information  on  MFA,  see  the 
Commission report COM(2008)590 and SEC(2008)2504. 
The figures concerning the EIB mandates are displayed in Table A1 and references to legal bases are 
listed in Table A4 of the Annex. 
For the most recent report on the functioning of the Fund, see COM(2006)695 "Comprehensive Report 
on the functioning of the Guarantee Fund" and the annexed staff working document (SEC(2006)1460). 
Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for 
external actions, (OJ L 293, 12.11.1994, p.1). 

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It  should  be  noted  that,  following  an  action  undertaken  by  the  Parliament,  on  6  November 
2008 the Court of Justice annulled Council Decision 2006/1016/EC since it was not adopted 
under the correct legal basis. The Court, while annulling the Decision, ordered “that its effects 
be maintained for EIB financing arrangements entered into before the entry into force, within 
a period of 12 months from the date of delivery of this judgment, of a new decision adopted on 
the appropriate legal basis, namely Articles 179 EC and 181a EC together”. The Commission 
is currently preparing a proposal to the European Parliament and the Council to this effect. 

3. 

DATA ON RISKS COVERED BY THE BUDGET 

3.1. 

Definition of risk 

The risks borne by the Budget derive from the outstanding amount of capital and interest in 
respect of guaranteed operations. 

Defaulting  operations  will  be  covered  by  the  Fund  when  they  are  linked  to  third  countries 
(73%  of  the  total  outstanding  amount  guaranteed  as  of  30 June 2008)  and  directly  by  the 
Budget where Member States are involved (loans to or for the benefit of projects in Member 
States account for the remaining 27% of the total outstanding amount). The large proportion 
of  guaranteed  loans  linked  to  Member  States is the result of the recent enlargement rounds. 
According  to  Article 1,  third  paragraph,  of  the  Fund  Regulation,  once  a  country  becomes  a 
Member State, the risk on the loans is transferred from the Fund to the Budget. 

For  the  purpose  of  this  report,  two  methods  are  used  for  evaluating  the  risks  borne  by  the 
Budget (either directly or indirectly via the Fund): 

–  The  method  of  calculating  the  total  amount  of  capital  outstanding  for  the  operations 
concerned on a given date including accrued interest. This methodology gives the level of 
risk supported by the Budget on a given date. 

–  The budgetary approach defined as "the annual risk borne by the Budget" is based on the 
calculation  of  the  maximum  amount  which  the  Community  would  have  to  pay  out  in  a 
financial year assuming that all guaranteed loans are in default7. 

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For the purpose of this calculation, it is assumed that defaulting loans are not accelerated, i.e. only due 
payments are taken into account (see also Section 1 of the Annex). 

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Table 1: Total outstanding amounts covered as of 30 June 2008 in EUR million 

Outstanding 
Capital 

Accrued Interest 

Total 

% 

Member States* 

MFA 

Euratom 

EIB 

Sub-total Member States* 

Third Countries 

MFA 

Euratom 

EIB 

Sub-total third countries 

Total 

196 

435 

3 976 

4 606 

534 

39 

11 729 

12 302 

16 908 

5 

9 

36 

51 

13 

1 

128 

142 

193 

201 

444 

4 012 

4 657 

547 

40 

11 857 

12 444 

1% 

3% 

23% 

27% 

3% 

<1% 

69% 

73% 

17 101 

100% 

*  This risk is directly covered by the Budget and includes Bulgaria and Romania as they have joined the EU on 

01.01.2007. 

Tables  A1,  A2,  A3  and  A4  of  the  Annex  provide  more  detailed  information  on  these 
outstanding amounts, in particular in terms of ceiling, disbursed amounts or guarantee rates. 

The total outstanding amount of capital and interest covered by the budget slightly decreased 
situation  at 
by  EUR 122 million 
31 December 2007. 

to  EUR 17 101  million  compared  with 

the 

3.2. 

Risk linked to Member States 

Current risks on Member States result from loans granted prior to accession. 

In  the  second  half  of  2008,  the  Budget  will  bear  a  risk  linked  to  Member  States  of 
EUR 378 million.  Table 2  shows  that  Bulgaria  and  Romania  are  ranked  first  and  second 
among Member States in terms of their outstanding amount. 

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Table  2:  Ranking  of  the  Member  States  according  to  the  exposure  with  regard  to  the 
maximum risk borne by the budget in the 2nd half 2008 (EUR million) 

Ranking 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

Country 

Romania 

Bulgaria 

Czech Republic 

Poland 

Slovakia 

Slovenia 

Hungary 

Cyprus 

Latvia 

Lithuania 

Estonia 

Malta 

Total 

2008 

116.7 

91.9 

45.2 

42.3 

32.5 

19.1 

18.1 

4.8 

3.7 

3.3 

0.6 

0.3 

% 

30.8% 

24.3% 

11.9% 

11.2% 

8.6% 

5.0% 

4.8% 

1.3% 

1.0% 

0.9% 

0.1% 

0.1% 

378.3 

100.0% 

The risk on Member States concerns all Members States involved in the last two enlargements 
with maturities ending 2031. 

3.3. 

Risk linked to third countries 

In the second half of 2008, the Fund will bear a maximum risk related to third countries of 
EUR 571 million. The top ten countries according to their total outstanding are listed below. 
They account for 79% of the risk borne by the Fund in 2008. The economic situation of these 
countries is analysed and commented in Section 6 below. 

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Table 3: Ranking of the 10 most important third countries according to the exposure 
with regard to the maximum risk borne by the Fund in the 2nd half 2008 
(EUR million) 

Ranking 

Country 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

Turkey 

Egypt 

Tunisia 

Morocco 

Lebanon 

South Africa 

Serbia  

Mexico 

Jordan 

Croatia 

2008 

158.4 

91.7 

64.6 

64.4 

55.0 

46.8 

29.4 

20.5 

20.4 

20.3 

% of the total 
maximum risk 

21.8% 

12.6% 

8.9% 

8.9% 

7.6% 

6.4% 

4.0% 

2.8% 

2.8% 

2.8% 

Total of the 10 

571.3 

78.7% 

The Fund covers the guaranteed loans of 57 countries with maturities ending 2038. Details by 
country are provided in Table A2 of the Annex. 

3.4. 

Global risk covered by the Budget 

In  total,  the  Budget  will  cover  for  the  second  half  2008  an  amount  of  EUR 1 104 million 
representing the amounts due during this period, of which 34% are due by Member States (see 
Table A2 in the Annex). 

3.5. 

Evolution of risk 

The  risk  towards  Member  States  should  decrease  in  future  for  the  loans  to  Member  States 
under  Euratom,  MFA  or  EIB  guaranteed  financing  which  are  reimbursed  (see  Graph A1  in 
Section 1.3 of the Annex). 

However,  the  total  risk  towards  Member  States  will  increase  with  the  activation  of  the 
Community  medium-term  financial  assistance  facility  (balance-of-payments  facility,  BoP). 
This financial facility enables loans to be granted to one or more Member States which have 
not  yet  adopted  the  euro  and  which  are  experiencing,  or  are  seriously  threatened  with, 

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difficulties  in  their  balance  of  current  payments.  A  loan  agreement  with  Hungary  of 
EUR 6 500 million to Hungary was signed in the second semester 20088. 

MFA loans to third countries are subject to individual decisions by the Council. The financial 
assistance  granted  under  Council  Decision  2007/860/EC  of  10  December  2007  providing 
macro-financial assistance to Lebanon consists of EUR 50 million in loans and up to EUR 30 
million in grants. The intention is now to disburse the loan part in two equal tranches in 2009. 
The Euratom lending to Member States or in certain eligible non-member countries (Russian 
Federation,  Armenia,  Ukraine)  has  a  ceiling  of  EUR 4 billion  of  which  around  85%  have 
already been used. The remaining margin is about EUR 600 million. Under the existing loan 
agreement  of  2004  to  K2R4  in  Ukraine  (EUR  equivalent  of  USD 83 million  Loan  Facility 
Agreement), EUR 39 million was disbursed in 2007. As explained in Section 2, a new tranche 
of USD 22 million was disbursed on 10 October 2008. 

The  previous  general  mandate  to  the  EIB  expired  on  31  July  2007.  At  this  date,  contracts 
corresponding to a total 98% of the overall ceiling under this mandate (EUR 20 060 million – 
see Table A5 of the Annex) had been signed. A total amount of EUR 6 774 million remains to 
be  disbursed  under  previous  EIB  mandates,  of  which  97%  relate  to  the  previous  general 
mandate9  and  should  be  disbursed  within  10  years  from  the  end  of  this  mandate,  as  the 
guarantee of the Community lapses at the end of this period10. 

The most important item that will impact the risk for the Budget in future is the Community 
guarantee  granted  to  the  EIB  under  the  general  mandate  2007-2013.  The  Community 
guarantee  is  restricted  to  65%  of  the  aggregate  amount  of  credit  disbursed  and  guarantees 
provided under EIB Financing Operations, less amounts reimbursed and plus all related sums, 
with a maximum ceiling of EUR 27 800 million11. A total amount of EUR 3 761 million was 
signed at 30 June 2008 under this mandate, of which EUR 3 352 million is undisbursed at this 
date (see Table A6 of the Annex). 

In  Section  1.3  of  the  Annex,  Graph A2  presents  simulations  of  some  scenarios  of 
disbursements under the mandates preceding the general mandate 2007-2013, as well as under 
the  general  mandate  2007-2013,  as  those  disbursements  have  a  strong  impact  on  the 
provisioning of the Fund. 

4. 

DEFAULTS, ACTIVATION OF BUDGET GUARANTEES AND ARREARS 

4.1. 

Payments from cash resources 

The Commission draws on its cash resources in order to avoid delays and resulting costs in 
servicing its borrowing operations when a debtor is late in paying the Commission12. 

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In November 2008, Latvia has approached the EU for an assistance under the BoP facility. 
See Section 1.3 of the Annex. 
See  Article  1.06 of  the  Restated  and Amended Guarantee  Agreement  signed  between  the  EC  and  the 
EIB on 30 August/2 September 2005. 
Broken down into a basic ceiling of a fixed maximum amount of EUR 25 800 million and an optional 
mandate of EUR 2 000 million to be decided upon by the Council. 
See  Article  12  of  Council  Regulation  (EC, Euratom)  No  1150/2000  of  22  May  2000  implementing 
Decision 94/728/EC, Euratom, on the system of the Communities' own resources. 

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4.2. 

Payments from the Budget 

No  appropriation  was  requested  under  Budget  Article  01 04 01,  "European  Community 
guarantees for lending operations", as no default was recorded in the first half of 2008. 

4.3. 

Activation of the Guarantee Fund for external actions 

In  the  event  of  late  payment  by  the  beneficiary  of  a  loan  (third  countries)  granted  or 
guaranteed by the Community, the Fund is called on to cover the default within three months 
of the date on which payment is due.13 

During the first half of 2008, the Fund was not called. 

The total arrears at 30 June 2008 i.e. penalty interests with the Republic of Argentina, amount 
to USD 1 718 493.12; thereof USD 1 448 433.44 (EUR equivalent 918 823.54) are still to be 
recovered by the Fund. As the Fund was not called for the remaining difference, this amount 
is due to the EIB. 

5. 

GUARANTEE FUND FOR EXTERNAL ACTIONS 

5.1. 

Recoveries 

No  recovery  occurred  in  the  first  half  2008.  However,  a  recovery  of  USD 1 448 433.44 
penalty interests from the Republic of Argentina took place on 12 December 2008. 

5.2. 

Assets 

At 30 June 2008, the net assets of the Fund amounted to EUR 1 029 656 202.33. 

5.3. 

Target amount 

resources 

The Fund has to reach an appropriate level (target amount) set at 9% of the total outstanding 
capital  liabilities  arising  from  each  operation,  plus  accrued  interest.  The  ratio  between  the 
liabilities14 
Fund's 
(EUR 12 443 426 701.62) within the meaning of the Fund Regulation has slightly improved 
from 8.26% at 31 December 2007 to 8.29% at 30 June 2008. The ratio will approach the 9% 
target rate after the transfer of EUR 91.60 million inserted in the Preliminary Draft Budget of 
2009 at year-end 2007 will be executed in January 2009.  

(EUR 1 029 656 202.33) 

outstanding 

capital 

and 

At  year-end  2007,  the  Fund  resources  were  lower  than  the  target  amount.  According  to  the 
new  provisioning  rules  adopted  by  the  Council  on  30 January 200715,  a  provisioning  of 
EUR 91.60 million  was  inserted  in  the  Preliminary  Draft  Budget  of  2009  together  with  an 
amount of EUR 500 000.00 for the external evaluation under the mid-term review of the EIB 
external mandate pursuant to Council Decision 2006/1016/EC16. 

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16 

For more details, see Section 1.4.3 of the Annex. 
Including accrued interests. 
Council Regulation (EC, Euratom) No 89/2007 of 30 January 2007 (OJ L 22, 31.1.2007, p. 1). 
OJ L 414, 30.12.2006, p. 102. 

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6. 

EVALUATION  OF  RISKS:  ECONOMIC  AND  FINANCIAL  SITUATION  OF  THIRD 
COUNTRIES BENEFITING FROM THE MOST IMPORTANT EU LOAN OPERATIONS 

6.1. 

Introduction 

Previous sections of the report provide information on quantitative aspects of the risk borne 
by the Budget. However, the quality of the risks which depend on the type of operation and 
the standing of the borrowers (see Section 3.3 above) should also be assessed. Tables on the 
country risk evaluation are presented separately in the Commission Staff Working Document. 
A  summary  of  this  analysis  is  provided  in  the  report  and  the  annex  for  the  ten  countries 
having the highest risk to the Budget in the second half of 2008 (see Section 3.3 above) and 
the  countries  having  a  direct  exposure  with  the  Community  budget  (MFA  and  Euratom 
Loans).  The  analysis  related  the  candidate  countries  and  the  potential  candidate  countries  is 
provided below. 

6.2. 

Candidate countries 

In Croatia, real GDP (Gross Domestic Product) growth rose by 5.6% in 2007, up from 4.8% 
in  2006.  Growth  was  mainly  driven  by  an  acceleration  of  private  and  public  consumption 
growth, fuelled by strong, but decelerating credit growth, one-off payments to pensioners, and 
pre-election spending. Economic growth slowed to 4.3% year-on year in the first quarter of 
2008 with some rebalancing, as consumption moderated amid stronger investment activity, in 
particular private investment, partially reflecting some improvements in the overall business 
environment. The current account deficit widened from 7.9% of GDP in 2006 to 8.7% in 2007 
and further to 9.6% in the twelve months to March 2008, mainly due to a higher trade deficit. 
The latter was fuelled by strong domestic demand, higher world commodity and energy prices 
and lower export growth. Net inflows of FDI (Foreign Direct Investments) increased by 33% 
in  2007  and  reached  9.1%  of  GDP,  and  thus  more  than  off-set  the  current  account  deficit. 
Gross external debt continued to increase, driven by an acceleration of direct borrowing of the 
corporate  sector  while  the  general  government  as  well  as  the  banking  sector  reduced  their 
outstanding foreign liabilities. The gross external debt ratio increased from 85.5% of GDP at 
end-2006 to 88.9% at end-2007. 

In  the  former  Yugoslav  Republic  of  Macedonia,  output  growth  accelerated  markedly  to 
about 5% (in real terms) in 2007, compared to 4% in 2006. Important sources for growth were 
exports of steel products and private consumption. The current account deteriorated during the 
last months of the year, reaching a deficit of nearly 3% of GDP end-2007. Gross FDI inflows 
came back to 4.8% of GDP end-2007, after a single privatisation project in the energy sector 
had  raised  FDI  inflows  to  nearly  6%  of  GDP  in  2006.  Early  debt  repayments  reduced  the 
external debt of the country to some 50% of GDP.  

In Turkey, annual GDP growth amounted to 4.5% in 2007, down from 6.9% in 2006. Higher 
inflation and a severe monetary policy tightening by the Central Bank in mid-2006 dampened 
domestic  demand  growth.  The  current  account  deficit  remained  constant  at  almost  6%  of 
GDP.  Gross  FDI  inflows  reached  3%  of  GDP  in  2007,  and  about  two  thirds  targeted  the 
financial  sector.  In  the  previous  year,  the  external  debt  of  the  country  fell  by  about  2 
percentage points to 37% of GDP by end-2007. At the same time, public debt fell to 39% of 
GDP from 46% of GDP in 2006. Turkish banks frequently borrow internationally to finance 
lending  domestically,  so  they  are  expected  gradually  to  feel  the  effect  of  the  global  credit 
squeeze. 

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6.3. 

Potential candidate countries  

In Bosnia and Herzegovina real GDP growth decelerated from 6.7% in 2006 to 6% in 2007. 
In  2007  the  widening  of  the  trade  deficit  contributed  to  an  increase  of  the  current  account 
deficit from 8.4% of GDP in 2006 to 13.1% of GDP in 2007. The current account deficit was 
fully financed by net FDI as large privatisations in the Republika Srpska (Република Српска) 
together with a relatively better performance of greenfield investments led to a surge in FDI to 
13.8% of GDP. External public debt declined to 18.5% of GDP at the end of 2007, while the 
total external debt is estimated below 50% of GDP. 

In Serbia real GDP grew by 7.5% during 2007. The current account deficit widened to 16% 
of  GDP,  driven  by  a  growing  trade  deficit  and  a  decline  in  net  current  transfers.  Net  FDI 
inflow declined to 5.1% of GDP while foreign borrowing grew to 10.3% of GDP. As a result 
of the slowdown in capital inflows, foreign exchange accumulation of the National Bank of 
Serbia fell to 3% of GDP. Foreign exchange reserves of the National Bank of Serbia stood at 
7.5  months  worth  of  imports  of  goods  and  services  at  the  end  of  the  year.  External  debt 
remained  at  62%  of  GDP  while  private  and  public  sector  external  debt  by  the  end  of  2007 
accounted for 41% and 21% of GDP, respectively. 

In  Montenegro,  GDP  estimates  points  to  a  robust  expansion  of  the  economy  by  8%  in  the 
first  half  of  2008  fuelled  mainly  by  services  on  the  production  side  and  by  private 
consumption on the demand side. The current account deficit strongly deteriorated to 39% of 
GDP  driven  by  the  sizeable  trade  deficit  and  notably  stagnating  exports.  Yet,  FDI  inflows 
decreased moderately during the first half of 2008, bringing net FDI down to 22% of GDP. 
The  public  debt  increased  to  33.6%  of  GDP  due  to  the  surge  in  domestic  indebtedness.  By 
contrast, the share of external public debt decreased to 17.5% of GDP, following repayments 
to multilateral creditors facilitated by the good fiscal outcome. 

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