Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 30 June 2009 SEC(2010)479
Date: 2010-04-30
Institutions: European Commission
Subjects: Community loan, EU Member State, European Investment Bank, budgetary reserve (EU), general budget (EU), investment protection, macroeconomics, microeconomics, report, third country

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EUROPEAN COMMISSION 

Brussels, 30.4.2010 
COM(2010)188 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 30 June 2009 

SEC(2010)479 

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TABLE OF CONTENTS 

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

Events since the last report at 31 December 2008 ....................................................... 4 

Balance of payments support to non-euro Member States........................................... 4 

Macro-financial assistance ........................................................................................... 4 

EU budget guarantee for EIB external financing......................................................... 4 

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

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

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............................................... 10 

Payments from cash resources ................................................................................... 10 

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 ............................................................................................................ 11 

Evaluation of risks: Economic and financial situation of third countries with the 
largest exposure.......................................................................................................... 11 

Objectives................................................................................................................... 11 

Risk assessment methods ........................................................................................... 11 

1. 

2. 

2.1. 

2.2. 

2.3. 

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. 

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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 "SWD")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 Union with macroeconomic objectives, i.e. macro-financial 
assistance3  ("MFA")  loans  to  third  countries  and  in  conjunction  with  the  Bretton  Woods 
institutions and balance-of-payments ("BoP") loans granting support to non-euro Member 
States experiencing balance-of-payments difficulties; and 

–  loans  with  microeconomic  objectives,  i.e.  Euratom  loans  and  most  importantly  European 
Investment  Bank  ("EIB")  financing  of  operations  in  non-Member  States  ("EIB  external 
financing")4. The latter are covered by EU guarantee5. 

The  EIB  external  financing,  the  Euratom  loans  and  the  MFA  loans  have  since  1994  been 
covered  by  the  Guarantee  Fund  for  external  actions  ("the  Fund"),6  while  BoP  loans  are 
directly  covered  by  the  budget.  The  Fund  covers  defaults  on  loans  and  loan  guarantees 
granted to non-Member States or for projects in non-Member States and was established: 

to provide a 'liquidity cushion' in order to avoid calling on the Budget every time a default or 
late payment on a guaranteed loan arises; and 

to create an instrument of budgetary discipline by laying down a financial framework for the 
development  of  EU  policy  on  guarantees  for  Commission  and  EIB  loans  to  non-member 
countries7. 

–  Following an amendment8 of the Guarantee Fund Regulation in 2004, the Fund's coverage 
is withdrawn if third countries become Member States and the risk is transferred from the 
Fund to be directly born by the Budget. The Fund is provisioned from the Budget and has 
to be maintained at a certain percentage of the outstanding amount of the loans and loan 
guarantees covered by the Fund. This percentage, known as the target rate, is currently 9%. 
If there are insufficient resources in the Fund, recourse will be made to the Budget. 

1 

2 
3 

4 

5 

6 

7 

8 

COM(2009)398  and  SEC(2009)1063  make  up  the  previous  report  on  the  guarantees  covered  by  the 
Budget at 31 December 2008. 
SEC(2010)479. 
MFA  may  also  take  the  form  of  grants  to  third  countries.  For  more  information  on  MFA,  see 
Commission report COM(2009)514 and SEC(2009)1279. 
The figures concerning the EIB mandates are displayed in Table A1 and references to legal bases are 
listed in Table A4 of the SWD. 
Most  recently  established  for  the  period  1  February  2007—31  October  2011  by  Decision  No 
633/2009/EC of the European Parliament and of the Council of 13 July 2009 (OJ L 190, 22.7.2009, p. 
1) (the "External Mandate Decision"), replacing Council Decision 2006/1016/EC of 19 December 2006. 
Council  Regulation  (EC,  Euratom)  No  480/2009  of  25 May 2009  establishing  a  Guarantee  Fund  for 
external actions (codified version), the "Guarantee Fund Regulation" (OJ L 145, 10.6.2009, p.10). 
For a comprehensive report on the functioning of the Fund, see COM(2006)695 and the accompanying 
Staff Working Document (SEC(2006)1460). 
Council Regulation (EC, Euratom) No 2273/2004 (OJ L 396, 31.12.2004, p. 28). 

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In 2007, an amendment9 of the Council Regulation set up a new provisioning mechanism. It 
functions through annual transfers from the Budget and involves a smoothing mechanism to 
limit the impact of calls on the Fund (see also Section 5.3 below). An external evaluation is 
currently assessing the functioning of the Fund, including the target rate, as part of a mid-term 
review.  

2. 

EVENTS SINCE THE LAST REPORT AT 31 DECEMBER 2008 

2.1. 

Balance of payments support to non-euro Member States 

From  a  quantitative  point  of  view,  the  most  important  development  during  the  first  half  of 
2009 were two disbursements of loans in the context of the BoP support for non-euro Member 
States in the wake of the financial crisis. The first tranche of EUR 1 billion of the BoP loan 
granted to Latvia was disbursed in February 2009. The second tranche of EUR 2 billion of the 
BoP  loan  granted  to  Hungary  was  disbursed  in  March  2009  (see  section  3.5).  These  loans 
have  been  refinanced  “back-to-back”  via  the  issuance  of  EC  benchmark  bonds  and  are  not 
covered by the Fund. 

2.2.  Macro-financial assistance 

A first disbursement of EUR 25 million out of the EUR 50 million MFA loan to Lebanon took 
place during the first half of 2009. The loan has been refinanced “back-to-back” via a private 
placement borrowing operation. 

2.3. 

EU budget guarantee for EIB external financing 

Regarding EIB financing operations, a total amount of EUR 8 611 million had been signed by 
the EIB under the External Mandate Decision by 30 June 2009. Concerning the disbursement 
volume,  a  total  amount  of  EUR 2 576  million  was  signed  during  the  first  half  of  2009  of 
which EUR 260 million were disbursed by 30 June 2009. 

3. 

DATA ON RISKS COVERED BY THE BUDGET 

3.1. 

Definition of risk 

The risk borne by the Budget 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 
(61%  of  the  total  outstanding  amount  guaranteed  as  of  30 June 2009)  and  directly  by  the 
Budget  where  Member  States  are  involved  (BoP  loans  and  loans  to  or  for  the  benefit  of 
projects  in  Member  States  account  for  the  remaining  39%  of  the  total  outstanding  amount 
guaranteed). The large proportion of guaranteed loans linked to Member States is the result of 
the  most  recent  enlargement  rounds10  and  the  activation  of  the  EU  medium-term  financial 
assistance facility for Member States not having adopted the EUR (the BoP facility). 

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): 

9 
10 

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

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–  The  method  of  calculating  the  total  amount  of  capital  outstanding  for  the  operations 
concerned  on  a  given  date  including  accrued  interest.  This  methodology  allows 
determining the total amount of risk supported by the Budget on a given date for all future 
payment  obligations  independent  of  when  in  the  future  these  payments  are  due  and 
whether they are covered by the Fund or not. 

–  The budgetary approach defined as "the annual risk borne by the Budget" is based on the 
calculation  of  the  maximum  amount  which  the  EU  would  have  to  pay  out  in  a  financial 
year assuming that all guaranteed loans are in default11. 

11 

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 30 June 2009 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 

115 

431 

5 000 

3 659 

9 205 

536 

50 

13 659 

14 245 

23 450 

*  This risk is directly covered by the Budget. 

** This risk is covered by the Fund. 

1 

3 

64 

33 

101 

4 

0 

122 

126 

227 

116 

434 

5 064 

3 692 

9 306 

540 

50 

13 781 

14 371 

<1% 

2% 

21% 

16% 

39% 

2% 

<1% 

58% 

61% 

23 677 

100% 

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 2 950 million to EUR 23 677 million compared with the situation at 31 December 2008. 

3.2. 

Risk linked to Member States 

Current risks on Member States result from loans granted prior to accession and the activation 
of the BoP facility. 

In  the  second  semester  of  2009,  the  Budget  will  bear  a  maximum  risk  linked  to  Member 
States of EUR 482.7 million (representing the amounts due during this period and assuming 
that  defaulting  loans  are  not  accelerated).  Table 2  shows  that  Romania  and  Hungary  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 during the 2nd semester 2009 (EUR million) 

Ranking 

Country 

Maximum risk (M 
EUR, rounded) 

% of the total 
maximum risk 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

Romania 

Hungary 

Bulgaria 

Czech Republic 

Poland 

Slovak Republic 

Slovenia 

Cyprus 

Latvia 

Lithuania 

Estonia 

Malta 

Total 

152.4 

122.5 

68.3 

42.3 

41.7 

30.5 

12.4 

4.8 

3.6 

3.2 

0.5 

0.3 

31.6% 

25.4% 

14.1% 

8.8% 

8.7% 

6.3% 

2.6% 

1.0% 

0.7% 

0.6% 

0.1% 

0.0% 

482.7 

100.0% 

The  risk  on  Member  States  concerns  EIB,  MFA  and  Euratom  loans  granted  before  the  last 
two enlargements and the loans granted under the BoP facility. 

3.3. 

Risk linked to third countries 

In the second semester of 2009, the Fund will bear a maximum risk related to third countries 
of  EUR 594 million  (representing  the  amounts  due  during  this  period  and  assuming  that 
defaulting loans are not accelerated). The top ten countries according to their total outstanding 
are  listed  below.  They  account  for  76.1%  of  the  risk  borne  by  the  Fund  during  the  second 
semester 2009. The economic situation of these countries 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  during  the  2nd  semester  2009
(EUR million) 

Ranking 

Country 

Maximum risk (M 
EUR, rounded) 

% of the total 
maximum risk 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

Turkey 

Egypt 

Morocco 

Tunisia 

Lebanon 

South Africa 

Serbia 

Georgia 

Jordan 

Mexico 

156.5 

92.7 

70.5 

69.0 

58.1 

43.9 

34.2 

24.2 

22.9 

22.0 

20.0% 

11.9% 

9.0% 

8.8% 

7.4% 

5.6% 

4.4% 

3.1% 

2.9% 

2.8% 

Total of the 10 

594.0 

76.1% 

The Fund covers the guaranteed loans of 45 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  during  the  second  semester  2009  an  amount  of  EUR 1 263 
million representing the amounts due during this period, of which 38% are due by Member 
States (see Table A2 in the SWD). 

3.5. 

Evolution of risk 

•  Balance of payments facility 

The intensity of the international crisis has impacted some Member States which have not yet 
adopted the euro. The activation of the EU medium-term financial assistance facility (balance 
of  payments  (BoP)  facility)  in  December  2008  gave  the  opportunity  for  some  of  them  to 
restore  investor  confidence  by  using  the  EU  financial  assistance.  The  increased  number  of 
eligible Member States following the recent enlargement necessitated an extension of the BoP 
facility  in  December  200812  from  EUR 12 billion  to  EUR 25 billion  in  response  to  the 

12 

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'  balances  of 
payments. 

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potential needs. Another increase to EUR 50 billion of the overall ceiling of the BoP facility 
was  decided  in  May  200913  in  order  for  the  EU  to  continue  to  be  able  to  react  quickly  to 
potential further demand for BoP assistance. 

Therefore,  the  total  risk  towards  Member  States  has  continued  to  increase  during  the  first 
semester  2009  following  the  disbursements  of  tranches  under  the  BoP  facility  for  a  total 
amount  of  EUR 3 billion.  Further  tranches  are  planned  to  be  disbursed  during  the  second 
semester for a total amount of EUR 4.2 billion. 

A BoP loan to Latvia was granted in early 200914 for up to EUR 3.1 billion. A first tranche of 
EUR 1 billion was disbursed on 25 February 2009. One additional tranche of EUR 1.2 billion 
was disbursed on 27 July 2009. 

On 26 March 2009, the second tranche of EUR 2 billion was disbursed for Hungary under the 
BoP  loan  granted  in  2008.  An  additional  tranche  of  EUR 1.5 billion  was  disbursed  on 
6 July 2009. 

A  loan  to  Romania  was  granted  on  6 May 2009  for  up  to  EUR 5 billion.  The  loan  will  be 
disbursed  in  several  tranches  in  2009  and  2010.  A  first  tranche  of  EUR 1.5 billion  was 
disbursed on 27 July 2009. 

•  Macro-financial assistance loans 

MFA loans to third countries have been subject to individual decisions by the Council15 and 
since  the  entry  into  force  of  the  Lisbon  Treaty  by  the  Council  and  the  Parliament.  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  payment  of  the  first  tranche  of  the  loan  (EUR 25 million) 
was made in early June 2009, and the release of the second tranche is planned in early 2010. 

•  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. No disbursements were 
made under the Euratom Facility in the 1st half of 2009. 

The  disbursement  of  the  third  (and  last)  tranche  under  the  Loan  Agreement  for  the  K2R4 
project (USD 10.3 million) in Ukraine took place on 12 October 2009. 

•  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  30  June  2009,  a  total  amount  of 

13 

14 
15 

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'  balances  of 
payments. 
Council Decision 2009/290/EC of 20 January 2009. 
After entry into force of the Lisbon Treaty, the co-decision procedure will be the ordinary legislative 
procedure.  

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EUR 4 794 million  remained  to  be  disbursed  under  this  mandate  but  may  still  be  disbursed 
under  EU  guarantee  within  10  years  from  the  end  of  the  mandate,  at  which  time  the  EU 
guarantee lapses for any undisbursed amounts. 

The most important item that will impact the risk for the Budget in future is the EU guarantee 
granted to the EIB under the External Mandate Decision. The external mandate is currently 
under  mid-term  review  and  a  decision  covering  the  remainder  of  the  current  Financial 
Perspective  2007-2013,  replacing  the  current  decision,  must  be  adopted  by  Council  and 
Parliament before 31 October 2011. The EU guarantee is restricted to 65% of the aggregate 
amount  of  credits  disbursed  and  guarantees  provided  under  EIB  Financing  Operations,  less 
amounts 
related  sums,  with  a  maximum  ceiling  of 
EUR 27 800 million16. A total amount of EUR 8 611 million had been signed at 30 June 2009 
under this mandate, of which EUR 7 449 million remained undisbursed at that date (see Table 
A6 of the SWD). 

reimbursed  and  plus  all 

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 EU17. 

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 2009. 

4.3. 

Activation of the Guarantee Fund for external actions 

In  the  event  of  late  payment  by  the  beneficiary  of  a  loan  to  third  countries  granted  or 
guaranteed by the EU, the Fund is called on to cover the default within three months of the 
date on which payment is due18. 

During the first half of 2009, the Fund was not called. 

5. 

GUARANTEE FUND FOR EXTERNAL ACTIONS 

5.1. 

Recoveries 

As of 30 June 2009, the Fund had no arrears to recover. 

5.2. 

Assets 

At 30 June 2009, the net assets19 of the Fund amounted to EUR 1 205 807 618. 

16 

17 

18 

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. The activation of the optional mandate may be decided by the Council 
and the European Parliament in the context of the mid-term review. 
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 EU's own resources. 
For more details, see Section 1.4.3 of the SWD. 

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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 
liabilities20 
Fund's 
(EUR 14 375 441 140) within the meaning of the Fund Regulation has slightly increased from 
8.34% at 31 December 2008 to 8.39% at 30 June 2009. 

(EUR 1 205 807 618) 

outstanding 

resources 

capital 

and 

At  year-end  2008,  the  Fund  resources  were  lower  than  the  target  amount.  According  to  the 
the  Council 
provisioning 
a  provisioning  of 
EUR 93 810 000 million was inserted in the Preliminary Draft Budget of 2010. This amount 
was paid from the Budget to the Fund on 10 February 2010. 

in  200721, 

adopted  by 

rules 

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,  relating  to  third  countries.  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  credit  risk  and  exposure  to  the  Budget  in  2009  and  the  countries  having  a  direct 
exposure with the Budget (MFA and Euratom loans). 

19 
20 
21 

Total assets of the Fund minus accrued payables (EIB fees and audit fees). 
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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