52007SC1050

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Brussels, 30.7.2007

SEC(2007) 1050

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to the REPORT FROM THE COMMISSION to the budgetary authority on guarantees covered by the general budget situation at 31 December 2006 {COM(2007) 454 final}

TABLE OF CONTENTS

1. Explanatory notes on the situation of risks covered by the budget 3

1.1. Tables A1 and A2 3

1.1.1. Authorised ceiling (Table A1) 3

1.1.2. Capital outstanding (Table A1) 4

1.1.3. Annual risk (Tables A2) 4

1.2. Loan operations covered by a budget guarantee 7

1.3. Disbursement forecast 11

1.4. Payment of the budget guarantee 13

1.4.1. Borrowing/lending operations 13

1.4.2. Guarantees given to third parties 13

1.4.3. Activation of budget guarantees 14

2. Country-risk evaluation 15

2.1. Analyses on other countries 15

2.2. Explanatory notes for country-risk indicators 16

1. EXPLANATORY NOTES ON THE SITUATION OF RISKS COVERED BY THE BUDGET

1.1. Tables A1 and A2

The purpose of Tables A1 and A2 is to show the outstanding amount of guarantees and annual repayments of capital and interest in respect of borrowing and lending operations for which the risk is covered by the Budget. The figures show the maximum possible risk for the Community in respect of these operations and must not be read as meaning that these amounts will actually be drawn from the budget.

In these tables, figures related to “New Member States” refer to the Member States which acceded to the European Union on 1 May 2004 and on 1 January 2007.

1. 1.1. Authorised ceiling (Table A1)

This is the aggregate of the maximum amounts of capital authorised (ceilings) for each operation decided by the Council.

In order to relate it to the risk which the budget might have to cover, account should be taken of the following factors which could affect it:

Factor increasing the risk:

- the interest on the loans must be added to the authorised ceiling.

Factors reducing the risk:

- limitation of the guarantee given to the EIB[1]:

75% of the total amounts of loans signed in the Mediterranean countries based on the Mediterranean protocols of 1977 and the Council Regulations 1762/92/EEC and 1763/92/EEC.

70% of the total amounts of loans signed as part of lending operations with certain non-Member States authorised by the Council Decisions 96/723/EC, 97/256/EC, 98/348/EC and 98/729/EC and a sharing of risk between the Community and the EIB as the budget guarantee covers only political risks in some cases;

65% of the total amounts of loans signed as part of lending operations with certain non-Member States authorised by the Council Decisions 99/786/EC, 2000/24/EC as amended and 2006/1016/EC, and a sharing of risk between the Community and the EIB as the budget guarantee covers only political risks in some cases;

- operations already repaid, since the amounts concerned are the maximum amount of loans granted and not outstanding amounts authorised;

- the amounts authorised are not necessarily taken up in full.

Another factor to be considered is that some loans are disbursed in currencies, the ceiling may be exceeded when the amounts disbursed up to the date of the report are converted into EUR.

1.1.2. Capital outstanding (Table A1)

This is the amount of capital still to be repaid on a given date in respect of operations disbursed.

Compared with the previous aggregate, the amount outstanding does not include loans which have not yet been disbursed or the proportion of disbursed loans which have already been repaid.

1. 1.3. Annual risk (Tables A2)

Estimated amount of principal and interest due each financial year by each country according to disbursements made until 31 December 2006.

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1.2. Loan operations covered by a budget guarantee

Tables A3a, A3b(1), A3b(2) and A4

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1.3. Disbursement forecast

The risk towards Member States should decrease in future as the loans are reimbursed and no new loans will be signed with Member States or for projects in Member States under Euratom, MFA or EIB guaranteed lending. This situation could change in case some Member States which have not adopted the Euro call upon the Community medium-term financial assistance instrument (Balance-of-Payment)[2]. This facility is limited to EUR 12 billion.

Graph A1: Annual Risk borne directly by the Budget in EUR million from 2007 to 2013 based on the amounts (capital and interest) due by Member States under all operations (MFA, Euratom and EIB) disbursed at 31.12.2006

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At 31 December 2006, the EIB had still to disburse a total of EUR 7,389 million under the EUR 20,060 million current mandate 2000 - 2007:

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Graph A2: Disbursement forecast of EIB loans including the new mandate, MFA and Euratom loans and total estimated outstanding covered by the Fund

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1.4. Payment of the budget guarantee[3]

1.4.1. Borrowing/lending operations

In this type of operation, the Community borrows on the financial market and on-lends the proceeds (back-to-back) to Member States (balance of payments), non–Member States (Macro-financial assistance) or firms (Euratom).

The loan repayments are scheduled to match the repayments of the borrowings due from the Community. If the recipient of the loan is late in making a repayment, the Commission must draw on its resources to repay the borrowing on the due date.

The funds needed to pay the budget guarantee in the event of late payment by the recipient of a loan granted by the Community are raised as follows:

a) the amount required may be taken provisionally from cash resources in accordance with 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. This method is used so that the Community can immediately repay the borrowing on the date scheduled in the event of late payment by the recipient of the loan;

b) if the delay reaches to three months after the due date, the Commission draws on the Fund to cover the default. The funds obtained are used to replenish the Commission's cash resources;

c) the transfer procedure can be used to provide the budget heading with the appropriations needed to cover the default. This method is used when there are insufficient appropriations in the Fund and must be authorised in advance by the budgetary authority;

d) the re-use of amounts repaid by debtors who have defaulted, leading to activation of the Community guarantee, allows payments to be made within a short period of time always providing, of course, that there are recovered funds available.

1.4.2. Guarantees given to third parties

The loan guarantee is in respect of loans granted by the EIB. When the recipient of a guaranteed loan fails to make a payment on the due date, the EIB asks the Community to pay the amounts owed by the defaulter in accordance with the guarantee agreement. The guarantee call must be paid within three months of receiving the EIB's request. The EIB administers the loan with all the care required by banking practice and is obliged to seek to recover the payments due after the guarantee has been activated.

Since the entry into force of the Regulation establishing a Guarantee Fund for external actions[4], the provisions of the Agreement between the Community and the EIB on management of the Fund state that, after the EIB calls in the guarantee in the event of a default, the Commission must authorise the Bank to withdraw the corresponding amounts from the Fund within three months.

If there are insufficient resources in the Fund, the procedure used for activating the guarantee is the same as for borrowing/lending operations.

An implementation agreement was concluded between the Community and the EIB on 20 and 22 January 1999 to determine payment and repayment procedures in connection with Community guarantees to the EIB. This agreement is currently under revision in order to reflect the provisions of Council Decision 2006/1016/EC granting a Community guarantee to the European Investment Bank against losses under loans and loan guarantees for projects outside the Community[5].

1.4.3. Activation of budget guarantees

If a borrower defaults on an EIB loan guaranteed by the budget, the Community guarantee is called upon at the earliest three months after the date on which payment has fallen due. The Community will act within three months of receiving such a letter from the EIB calling for the guarantee to be activated, authorising the EIB to take the corresponding amounts from the Fund.

For loans granted by the EC or Euratom, default interest owed by loan beneficiaries for the time between the date on which cash resources are made available by the budget and the date of activation of the Fund is drawn from the Fund and repaid to the budget. For EIB loans, default interest is calculated during the period between the due date of a defaulted loan instalment and the date of receipt of the cash resources by the EIB from the Commission.

2. COUNTRY-RISK EVALUATION

Other countries representing important risks to the Budget, notably through EC macro-financial assistance, Euratom loans or guarantees of EIB projects related lending, and either categorised as “severely indebted” according to criteria set by the World Bank or facing significant imbalances in their external or debt situation are also included in the risk evaluation. The country risk evaluation presented below comprises short analyses or tables of risk indicators.

2.1. Analyses on other countries

For Romania, real GDP growth remains strong at 7.4% in the first half of 2006, driven in particular by household consumption growth of 11.8% and investment growth of 11.9%. 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, but the deficit remains largely covered by FDI and portfolio investments. The external debt of the country grew to around 34% of GDP in mid-2006 from around 30% of GDP one year earlier due in particular to the short-term private external debt growing rapidly.

For the former Yugoslav Republic of Macedonia, GDP growth was 2.6% (in real terms) in the first quarter of 2006, compared to 4.0% in 2005. The current account deficit reached 1.4% of GDP in 2005 and is expected to widen to 3% in 2006. Gross FDI inflows reached 1.7% of GDP in 2005 and the external debt of the country amounted to 47% of GDP at the end of 2005.

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.

Economic growth of Georgia remained strong, at around 9% (9.3% in 2005), despite the external shocks, (trade blockade imposed by Russia) supported by privatisation, foreign direct investment and structural reforms. Thanks to this strong growth performance, Georgia's external public debt was further reduced to about 22% of GDP (27% in 2005). The main economic policy challenge is to keep inflation in single digits. The 12-month inflation peaked at 14.5% in mid-2006 but subdued to 8.8% by end-2006. In October, Standard & Poor's changed the outlook on Georgia's sovereign credit rating (B+) from positive to stable against the backdrop of the increased geopolitical tensions.

Tajikistan ’s economy has continued to grow strongly in 2006, recording a growth rate of 8% of GDP. The government budget is expected to register an increased deficit in 2006 of 4.5% of GDP (IMF estimate). Thanks to the successful bilateral debt agreements with mainly Russia – Tajikistan’s largest creditor – and debt relief from the IMF (MDRI initiative in 2006), external debt has fallen to less than 35% of GDP in 2006. A deteriorating trade deficit (from 7% of GDP in 2004 and 12% in 2005 to the estimated more than 16% in 2006) is largely offset by a rapid growth in remittances. As a result, the current account deficit is expected to increase only moderately in 2006 (from 3.4% in 2005 to about 4.2%).

Algeria experienced a minor dip in economic growth in 2006 with a GDP growing at only 2.7%. In 2006 the current account reached more than 20% of GDP. The government balance was buoyant as well, as it was also composed of two digits. These surpluses offer good opportunities for further reform. The Algerian underdeveloped financial market needs a broadening and deepening to boost both investment and economic growth. Next to the financial markets, the overall business climate needs major improvements. With accession to the World Trade Organisation (WTO) at the horizon and the EU Association Agreement, Algeria can potentially move to free markets and free trade. The major challenge for the country is to create new jobs and consequently push the unemployment rate below the 10%. A recently launched programme to modernise the small and medium-size enterprise (SME) sector will help to prepare SMEs for inclusion in the free-trade zone between Algeria and the EU, as well as it's integration into the WTO.

The economy of Argentina continues to grow rapidly, led by strong domestic investment and consumption, and is expected to expand by around 8% in 2006. However, several years of buoyant growth and an undervalued peso have pushed up inflation pressure. In order to curb price increases the authorities undertook a series of measures, whose result was a contained inflation rate of 10% at the end of 2006. The foreign trade dynamism has allowed the country to run large current account surpluses. The strength of the economy has also led to a significant improvement in public finances, with the primary surplus expected to reach about 3.5% of GDP in 2006. In addition, the presidential election of October 2007 and 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 conducive to progress on structural reforms to address long-term vulnerabilities. Argentina remains in arrears to the EIB, having failed to pay the penalty interest (USD 1.7 million) stemming from previous arrears on a Regional Road Transportation project.

2.2. Explanatory notes for country-risk indicators

Standard footnotes

a) Includes only EC and EIB loans (outstanding disbursements) to CEEC, NIS and MED.The major changes in these figures are due to the transfer of accession countries from the “third countries” section in the “Member States” section as of 1 May 2004.

b) The higher the ranking number indicated by Euromoney, the lower the creditworthiness of the country.

c) Countries were rated on a scale of zero to 100 by The Institutional Investor; 100 represents the least chance of default. A given country may improve its rating and still fall in the ranking if the average global rating for all rated countries improves.

Abbreviations and English words used in tables

S&P | Standard and Poor's |

CCFF | Compensatory and Contingency Financing Facility |

EFF | Extended Fund Facility |

FDI | Foreign Direct Investment |

GDP | Gross Domestic Product |

SBA | Stand-By Arrangement |

STF | Systemic Transformation Facility |

est. | estimates |

m EUR | EUR million |

bn USD | USD billion |

n.a. | not available |

prelim. | preliminary |

p. | provisional |

Country-risk indicators (tables)

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[1] Within each portfolio individual EIB loans are, de facto, guaranteed at 100% until the global ceiling is reached.

[2] Council Decision 2002/332/EC of 18 February 2002, OJ L 53, 23.2.2002, p. 1.

[3] The Communities have granted loans and guaranteed loans to accession countries. Those loans and guarantees were covered by the Guarantee Fund and remain outstanding or in force after the date of accession. From that date, they cease to be external actions of the Communities and are therefore covered directly by the budget.

[4] Council Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for external actions, OJ L 293, 12.11.1994, p.1, as amended by Council Regulation (EC, Euratom) No 1149/1999, OJ L 139, 2.6.1999, p. 1, Council Regulation (EC, Euratom) No 2273/2004, OJ L 396, 31.12.2004, p. 28, and Council Regulation (EC, Euratom) No 89/2007, OJ L 22, 31.1.2007, p. 1.

[5] OJ L 414, 30.1.2.2006, p. 95.