Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 31 December 2008 {SEC(2009) 1063}
Date: 2009-07-30
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, 30.7.2009 
COM(2009) 398 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 31 December 2008 

{SEC(2009) 1063} 

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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. 

Introduction and types of covered operations .............................................................. 3 

Events since the last report at 30 June 2008 ................................................................ 3 

Data on risks covered by the Budget ........................................................................... 4 

Definition of risk .......................................................................................................... 4 

Risk linked to Member States ...................................................................................... 5 

Risk linked to third countries ....................................................................................... 6 

Global risk covered by the Budget............................................................................... 7 

Evolution of risk........................................................................................................... 7 

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

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

Payments from the Budget ........................................................................................... 9 

Activation of the Guarantee Fund for external actions ................................................ 9 

Guarantee Fund for external actions ............................................................................ 9 

Recoveries .................................................................................................................... 9 

Assets ........................................................................................................................... 9 

Target amount .............................................................................................................. 9 

Evaluation of risks: Economic and financial situation of third countries with the 
largest exposure.......................................................................................................... 10 

Objectives................................................................................................................... 10 

Risk assessment methods ........................................................................................... 10 

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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 (the "SWD")2 with a set of detailed tables and explanatory notes. 

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  ("BOP")  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 actions ("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 third 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.  In  2007,  an  amendment7  of  the  Council  Regulation  set  up  a  new  provisioning 
mechanism. The Budget directly covers loans to Member States granted or guaranteed by the 
Community. 

2. 

EVENTS SINCE THE LAST REPORT AT 30 JUNE 2008 

There were no disbursements under macro financial assistance during the second half of 2008. 
A new disbursement of USD 22 million for a Euratom loan took place in October 2008. 
A first tranche of EUR 2 000 million of the Balance of Payments loan granted to Hungary was 
disbursed in December 2008 (see section 3.5). 

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3 

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COM(2009)68  and  SEC(2009)159  make  up  the  previous  report  on  the  guarantees  covered  by  the 
Budget at 30 June 2008. 
SEC(2009)1063. 
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 SWD. 
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  accompanying  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). 
Council Regulation (EC, Euratom) No 89/2007 of 30 January 2007, (OJ L 22, 31.01.2007, p.1). 

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Regarding EIB financing operations, a total amount of EUR 5 943 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 2 052 million was disbursed during the second 
half of 2008 of which EUR 643 million was disbursed under the new general mandate 2007-
2013. 

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  on  the  grounds  that  it 
should have been adopted under a dual 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 adopted a proposal to the European Parliament and the Council to 
replace the annulled decision on 14 January 2009 COM (910) 2008. 

3. 

DATA ON RISKS COVERED BY THE BUDGET 

3.1. 

Definition of risk 

The  risk  borne  by  the  Budget  is  based  on  the  exposure  assessment  and  derives  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 
(68% of the total outstanding amount guaranteed as of 31 December 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 32% of the total outstanding amount guaranteed). The large 
proportion of guaranteed loans linked to Member States is the result of the recent enlargement 
rounds8  and  the  activation  of  the  Community  medium-term  financial  assistance  facility  for 
Member States not having adopted the EUR. 

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 default9. 

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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 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 SWD). 

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Table 1: Total outstanding amounts covered as of 31 December 2008 in EUR million 

Outstanding 
Capital 

Accrued Interest 

Total 

% 

Member States* 

MFA 

Euratom 

BoP 

EIB 

Sub-total Member States 

Third Countries 

MFA 

Euratom 

EIB 

Sub-total third countries 

Total 

140 

433 

2 000 

3 921 

6 494 

514 

53 

13 480 

14 047 

20 541 

2 

8 

4 

36 

50 

1 

7 

129 

137 

187 

142 

440 

2 004 

3 957 

6 544 

515 

60 

13 609 

14 184 

1% 

2% 

10% 

19% 

32% 

2% 

<1% 

66% 

68% 

20 728 

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  SWD  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  increased  by 
EUR 3 627 million to EUR 20 728 million compared with the situation at 30 June 2008 (see 
Section 3.5. below). 

3.2. 

Risk linked to Member States 

Current risks on Member States result from loans granted prior to accession and the activation 
of the balance of payment instrument at the end of 2008. 

In 2009, the Budget will bear a maximum risk linked to Member States of EUR 802 million. 
Table 2 shows that Romania and Czech Republic 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 2009 (EUR million) 

Ranking 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

Country 

Romania 

Czech Republic 

Bulgaria 

Hungary 

Poland 

Slovak Republic 

Slovenia 

Cyprus 

Latvia 

Lithuania 

Estonia 

Malta 

Total 

2009 

264.5 

144.3 

96.1 

93.7 

85.8 

66.2 

26.2 

9.5 

7.3 

6.4 

1.0 

0.7 

% 

33.0% 

18.0% 

12.0% 

11.7% 

10.7% 

8.3% 

3.3% 

1.2% 

0.9% 

0.8% 

0.1% 

0.1% 

801.8 

100.0% 

The risk on Member States concerns all loans granted before last two enlargements with the 
last loan maturing in 2038. 

3.3. 

Risk linked to third countries 

In 2009, the Fund will bear a maximum risk related to third countries of EUR 1 494 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 2009. The economic situation of these countries -as well 
as Montenegro, Georgia and Ukraine- is analysed and commented in the SWD. 

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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 2009 
(EUR million) 

Ranking 

Country 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

Turkey 

Egypt 

Morocco 

Tunisia 

South Africa 

Brazil 

 Lebanon 

Serbia 

Jordan 

Syria 

2009 

293.4 

208.7 

137.1 

131.2 

115.2 

80.8 

70.6 

57.0 

45.8 

35.6 

% of the total 
maximum risk 

19.6% 

14.0% 

9.2% 

8.8% 

7.7% 

5.4% 

4.7% 

3.8% 

3.1% 

2.4% 

Total of the 10 

1 175.3 

78.7% 

The Fund covers the guaranteed loans of 57 countries with maturities extending up to 2038. 
Details by country are provided in Table A2 of the SWD. 

3.4. 

Global risk covered by the Budget 

In  total,  the  Budget  will  cover  in  2009  an  amount  of  EUR 2 296  million  representing  the 
amounts due during this period, of which 35% are due by Member States (see Table A2 in the 
SWD). 

3.5. 

Evolution of risk 

•  Balance of payments facility 

The total risk towards Member States increased in 2008 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,  difficulties  in  their 
balance of payments.  

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On 2  December  200810, the ceiling for the maximum amount of loans being granted to non 
Euro-area Member States under the BOP facility was increased from EUR 12 billion to EUR 
25 billion. 

A first loan for Hungary of EUR 6 500 million was granted and signed in the second semester 
200811. One tranche of EUR 2 000 million was disbursed in December 2008. Another tranche 
of EUR 2 000 million was disbursed in March 2009. Two additional tranches are planned to 
be disbursed during the year 2009 for a total amount of EUR 2 500 million. 

A second loan to Latvia was granted in early 200912 for up to EUR 3 100 million. The loan 
will be disbursed in several tranches in 2009. 

On 18 May 200913, the limit on the outstanding amount to be granted to the Member States 
outside the euro area was increased from EUR 25 billion to EUR 50 billion.  

•  Macro-financial assistance loans 

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 loan part will be disbursed in two equal tranches in 2009.  

•  Euratom loans 

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  Energoatom  in  Ukraine  (EUR  equivalent  of  USD 83 million  Loan 
Facility Agreement), a new tranche of USD 22 million was disbursed on 10 October 2008. 

•  EIB loans 

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  SWD)  had  been  signed.  At  31  December  2008,  a  total  amount  of 
EUR 5 307 million  remained  to  be  disbursed  under  this  mandate  and  should  be  disbursed 
within 10 years from the end of the mandate, as the guarantee of the Community lapses at the 
end of this period14. 

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 

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Council Regulation (EC) No 1360/2008 of 2 December 2008 amending Regulation (EC) no 332/2002 
establishing  a  facility  providing  medium-term  financial  assistance  to  Member  States'  balance  of 
payments. 
Council Decision 09/102/EC of 4 November 2008. 
Council Decision 09/290/EC of 20 January 2009. 
Council  Regulation  (EC)  No  431/2009  of  18  May  2009  amending  Regulation  (EC)  no  332/2002 
establishing  a  facility  providing  medium-term  financial  assistance  to  Member  States'  balance  of 
payments. 
See  Article  1.06 of  the  Restated  and Amended Guarantee  Agreement  signed  between  the  EC  and  the 
EIB on 30 August/2 September 2005. 

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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 million15. A total amount of EUR 5 943 million had 
been  signed  at  31  December  2008  under  this  mandate,  of  which  EUR 5  053  million  was 
undisbursed at that date (see Table A6 of the SWD). 

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 Commission16. 

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 second 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.17 

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

5. 

GUARANTEE FUND FOR EXTERNAL ACTIONS 

5.1. 

Recoveries 

A recovery of USD 1 448 433.44 penalty interests from the Republic of Argentina took place 
on 12 December 2008.  

As of 31 December 2008, the Fund had no arrears to recover. 

5.2. 

Assets 

At 31 December 2008, the net assets18 of the Fund amounted to EUR 1 182 717 413. 

5.3. 

Target amount 

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 

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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. 
For more details, see Section 1.4.3 of the SWD. 
Total asset of the Fund minus accrued payables (EIB fees and Audit fees). 

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resources 

liabilities19 
Fund's 
(EUR 14 183 712 379) within the meaning of the Fund Regulation has slightly increased from 
8.29% at 30 June 2008 to 8.34% at 31 December 2008. 

(EUR 1 182 717 413) 

outstanding 

capital 

and 

At  year-end  2008,  the  Fund  resources  were  lower  than  the  target  amount.  According  to  the 
new  provisioning  rules  adopted  by  the  Council  on  30 January 200720,  a  provisioning  of 
EUR 93 100 000 was inserted in the Preliminary Draft Budget of 2010. This amount will be 
transferred from the Budget to the Fund in January 2010. 

6. 

EVALUATION  OF  RISKS:  ECONOMIC  AND  FINANCIAL  SITUATION  OF  THIRD 
COUNTRIES WITH THE LARGEST EXPOSURE 

6.1. 

Objectives 

The  previous  sections  of  this  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. 

6.2. 

Risk assessment methods 

The risk assessment in this report is based on the information on the economic and financial 
situation,  ratings  and  other  known  facts  of  the  countries  having  received  guaranteed  loans. 
This  assessment  does  not  include  estimations  of  expected  losses  and  recoveries  which  are 
inevitably highly uncertain. 

Country  risk  indicators  included  in  the  tables  in  the  SWD  indicate  the  evolution  of  risk  of 
defaults. This analysis is provided in the section 2 of the SWD for the countries having the 
highest  risk  to  the  Budget  in  2009  and  the  countries  having  a  direct  exposure  with  the 
Community budget (MFA and Euratom Loans). 

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Including accrued interests. 
Council Regulation (EC, Euratom) No 89/2007 of 30 January 2007 (OJ L 22, 31.1.2007, p. 1). 

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