52007SC0241

[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 23.2.2007

SEC(2007) 241

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to theREPORT FROM THE COMMISSIONto the budgetary authority on guarantees covered by the general budgetsituation at 30 June 2006{COM(2007) 66 final}

TABLE OF CONTENTS

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

1.1. Methodological remarks 3

1.2. Tables A1 to A3 3

1.2.1. Authorised ceiling (Table A1) 4

1.2.2. Capital outstanding (Table A1) 5

1.2.3. Annual risk (Tables A2 and A3) 5

1.2. Loan operations covered by a budget guarantee 9

1.3. Expected signature and disbursement of EIB loans 14

1.4. Payment of the budget guarantee 14

1.4.1. Borrowing/lending operations 14

1.4.2. Guarantees given to third parties 15

2. Methodological note on the analysis of the Community's estimated lending capacity in respect of non-member States in 2006 under the Guarantee Fund mechanism (table A4) 16

2.1. Reserve for loan guarantees to non-member States 16

2.2. Bases for the calculation of the provisioning of the Guarantee Fund 16

2.3. Basis for the provisioning of the Fund in the case of a partial guarantee 17

2.4. Provisioning of the Guarantee Fund 18

2.5. Activation of budget guarantees 18

2.6. Margin remaining in the guarantee reserve 18

2.7. Residual lending capacity 19

3. Country-risk evaluation 20

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

1.1. Methodological remarks

There are two methods for evaluating the risks borne by the Union budget:

- The method, often used by bankers, of calculating the total amount of capital outstanding for the operations concerned on a given date (situation described in Table A1);

- The more budgetary approach of calculating the maximum amount which the Community would have to pay out in each financial year assuming that all guaranteed loans are in default.

The second approach itself has been applied in two different ways:

- By reference only to actual disbursements at the date of the report, assuming that there are no early repayments (see Table A2 showing the lower limit of this maximum risk to the Union budget);

- On a more forward-looking basis, by reference to all the operations decided by the Council or proposed by the Commission in order to estimate the impact on future budgets, assuming that pending and planned Commission proposals are accepted (see Table A3 showing the upper limit of this maximum risk borne by the Union budget).

The latter exercise gives some idea of the future level of risks connected with the proposals made. However, a number of assumptions have to be made about dates of disbursement and terms of repayment (details are given below) as well as interest[1] and exchange rates[2].

The results are shown in Tables A1 to A3, which make separate assessments of the risks relating to countries inside the Community and countries outside the Community.

The overall figures quoted cover risks of different types; loans to one country in the case of macro-financial assistance and loans for projects in the case of EIB or Euratom operations.

1.2. Tables A1 to A3

The purpose of Tables A1 to A3 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 Union 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 the case of Table A3, in particular, it is not certain that all the operations described will actually be disbursed.

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

Figures concerning future Member States are reported under "Third Countries". After accession, they will be considered as Member States. This implies, in accordance with the amended Guarantee Fund regulation n° 2273/2004 of 22 December 2004, that the risk related to loans to these countries will be born directly by the budget and not by the Guarantee Fund.

1.2.1. Authorised ceiling (Table A1)[3]

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:

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 and 2000/24/EC as amended, 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.

- as the loans are disbursed in national currencies, the loan ceiling may be exceeded when the amount disbursed up to the date of the report are converted into EUR.

1.2.2. 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 nor the proportion of disbursed loans which have already been repaid. It may be described as the amount of loans which exist on a given date.

1. 2.3. Annual risk (Tables A2 and A3)

Estimated amount of principal and interest due each financial year.

This amount is calculated for:

a) disbursements only (Table A2) in which case the capital to be repaid corresponds to the amount outstanding;

b) disbursements, decisions still awaiting disbursement and Commission proposals still awaiting decisions (Table A3); in which case the capital to be repaid corresponds to the ceiling on loans authorised by a decision plus, where applicable, the amounts in respect of operations proposed by the Commission and not yet decided;

c) regarding the Member States section in Table A3, no future disbursements have been recorded as no new Council Decision or Commission proposal have been adopted in the framework of balance of payments support and Euratom loans for Member States.

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1.2. Loan operations covered by a budget guarantee

Tables A5a, A5b(1), A5b(2) and A6

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1.3. Expected signature and disbursement of EIB loans

The EIB has supplied the figures used for the calculation of the assumptions made for drawing up Table A3 (EIB loans with a Community guarantee to non-member States from its own resources).

Expected signatures:

At 30 June 2006 a total of EUR 9,080 million was still to be disbursed under the EUR 20,060 million General Mandate 2000 - 2007:

[pic] Disbursement forecasts:

As regards disbursement of the loans still awaiting signature, it is assumed that nothing will be paid in the year of signature, 10% in the second year, 25% a year between the third and fifth years and 15% in the sixth year.

1.4. Payment of the budget guarantee

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 Guarantee 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; any margin available in the guarantee reserve is drawn on first. This method is used when there are insufficient appropriations in the Guarantee 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 a financial institution such as 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 contract of guarantee. 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 demand the payments due after the guarantee has been activated.

Since the entry into force of the Regulation establishing a Guarantee Fund for external actions, 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 Guarantee 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.

2. Methodological note on the analysis of the Community's estimated lending capacity in respect of non- MEMBER STATES IN 2006 UNDER THE GUARANTEE FUND MECHANISM (TABLE A4)

2.1. Reserve for loan guarantees to non- member States

The Interinstitutional Agreement of 6 May 1999[4] on budgetary discipline and improvement of the budgetary procedure provides for the entry of a reserve for loan guarantees to non-Member States as a provision in the general budget of the European Communities. This reserve is intended to cover the requirements of the Guarantee Fund and, where necessary, activated guarantees exceeding the amount available in the Fund, so that these amounts may be charged to the budget.

The amount of the guarantee reserve is the same as in the financial perspective for 2000-2006, i.e. EUR 200 million per year at 1999 prices. The amount in the reserve is EUR 229 million in 2006.

The conditions for the entry, use and financing of the guarantee reserve are laid down in the following decisions:

- Council Decision 2000/597/EC of 29 September 2000 on the system of the Communities' own resources.

- Council Decision 2040/2000/EC on budgetary discipline.

- Council Regulation (ECSC, EC, Euratom) N°1605/2002 on the Financial Regulation of 25 June 2002 applicable to the general budget of the European Communities.

- Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994, establishing a Guarantee Fund for external actions, amended by Council Regulation (EC, Euratom) No 1149/99 of 25 May 1999 and by Council Regulation (EC, Euratom) No 2273/2004 of 22 December 2004.

2.2. Bases for the calculation of the provisioning of the Guarantee Fund

The bases for the provisioning of the Fund are calculated by applying the appropriate rate of guarantee (65% for the General Mandate 2000 - 2007, 70%, 75% or 100% for previous or specific mandates):

- to the loan guarantees authorised by the Council and to the loan guarantees proposed or being prepared by the Commission on the basis of the estimates of loan signatures contained in the financial statements (EIB and Euratom loans);

- to the loans (for financial assistance) authorised by the Council and to the loans proposed or being prepared by the Commission.

The annex to Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions, which relates to the arrangements for payments into the Guarantee Fund, states that, in the case of borrowing/lending operations or guarantees to financial bodies under a framework facility spread over a number of years and with a microeconomic and structural purpose, payments into the Fund will be made in annual instalments calculated on the basis of the annual amounts indicated in the financial statement attached to the Commission proposal, adapted where appropriate in the light of the Council decision (Commission decision in the case of Euratom loans).

For other Community borrowing/lending operations, such as loans for the balance of payments of third countries, whether made in one or several instalments, payments into the Fund are calculated on the basis of the total amount for the operation decided on by the Council.

The annex to the Regulation establishing the Guarantee Fund states that, as from the second year (in the case of operations spread over a number of years), the amounts to be paid into the Fund will be corrected by the difference recorded on 31 December of the previous year between the estimates that were taken as a basis for the previous payment and the actual figure for the loans signed during that year. Any difference relating to the previous year will give rise to a payment in the following year.

The annex states that, when it starts a payment procedure, the Commission will check the situation with regard to the performance of the operations which were the subject of previous payments and, where the commitment deadlines originally laid down have not been met, will propose that this will be taken into account in calculating the first payment to be made at the start of the following financial year for operations already under way.

2.3. Basis for the provisioning of the Fund in the case of a partial guarantee

For EIB loans covered by an aggregate 75% guarantee, the Fund was provisioned on the basis of 75% of the total amount of operations authorised.

The guarantee on the EIB loans authorised by the Council on 14 April 1997, 19 May 1998 and 14 December 1998 is limited to 70% of the total amount of credits opened. The basis for provisioning was 70% of the annual forecast of signatures.

The guarantee on the EIB loans authorised by the Council on 29 November 1999 and 22 December 1999 is limited to 65% of the total amount of credits opened. The basis for provisioning is 65% of the annual forecast of signatures.

The guarantee on the EIB loans authorised by the Council on 6 November 2001 and 22 December 2004 is 100% of the total amount of credits opened. The basis for provisioning is 100% of the annual forecast of signatures.

Macro-financial assistance loans are provisioned in full at the moment of the decision. Euratom loans are provisioned in full at the latest at the time of signing of the loan agreement.

2.4. Provisioning of the Guarantee Fund

Historically the amounts paid into the Fund were obtained by applying the rate of provisioning (14%) to the calculation base set out above. Pursuant to Articles 2 and 4 of the Regulation establishing the Guarantee Fund, the Fund is endowed by payments from the general budget equivalent to 14% of the capital value of the operations until it reaches the target amount. As the target amount was reached at 31 December 1997, the Commission, in accordance with the Regulation, submitted proposals to review the rate of provisioning. These proposals appear in the comprehensive report on the functioning of the Fund which the Commission drew up in accordance with Article 3 of the Regulation[5]. Regulation No 2728/94 establishing a Guarantee Fund for external actions has been amended by Council Regulation (EC, Euratom) No 1149/1999 of 25 May 1999 under which the provisioning rate for the Fund and the target amount are set at 9% from 1 January 2000. A further comprehensive report on the functioning of the Fund was adopted by the Commission[6] in October 2003. In line with the needs identified in the last Comprehensive Report, the Commission presented an amendment to the Regulation of the Guarantee Fund to improve the rules of the provisioning mechanism, i.e. the rules that determine how the Fund’s assets are brought in line with the target amount of the Fund[7]. The last comprehensive report on the functioning of the Fund was adopted by the Commission in November 2006[8].

2.5. Activation of budget guarantees

If a borrower defaults on an EIB loan guaranteed by the Union 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 Guarantee Fund.

Default interest owed by loan beneficiaries for the time between the date on which cash resources are made available by the Union budget and the date of activation of the Fund is drawn from the Fund and repaid to the Union 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.

2.6. Margin remaining in the guarantee reserve

The margin remaining in the guarantee reserve is equivalent to the difference between the reserve and the provisioning for the current year.

On the basis of the decisions adopted by the Council or the Commission and decisions proposed and forecasted (see Table A4), an amount of EUR 127.64 million is to be used from the Guarantee Reserve in 2006, leaving EUR 101.36 million available for further guaranteed lending operations.

If account is taken of the effect on the Guarantee Reserve of the provisioning of the Fund in respect of loans already decided and loans proposed and forecasted for 2006 the annual capacity available for loans is as follows:

- EUR 1,126.27 million for loans with a 100% guarantee under the Union budget, or

- EUR 1,732.72 million for loans with a 65% guarantee (in accordance with Council Decision 2000/24/EC of 22 December 1999).

2.7. Residual lending capacity

The residual lending capacity is the loan equivalent of the margin left in the reserve, allowing for the guarantee rates in force.

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3. COUNTRY-RISK EVALUATION

The country risk evaluation presented below comprises a table of risk indicators for each non-member State that has received EC macro-financial assistance and still has outstanding debts to the EC. Moreover, other third countries each representing more than 2% of the total outstanding debt to the EC (notably through guarantees of EIB project 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.

Altogether, the country analysis covers 44.4% of the total outstanding debt owned by the EC or guaranteed through its budget, thus providing a meaningful assessment of the risk.

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 are 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] An interest rate of 5.49% (provided by the EIB) has been applied for its new operations in Table A3.

[2] The exchange rates used for loans in currencies other than the euro are those of 30 June 2006.

[3] Since 1 May 2004, accession countries have been reclassified from non-member States in Member States but the authorised ceiling remains linked to the Mandate and the geographical area.

[4] To be replaced as of 01.01.07 by the Interinstitutional Agreement between the European Parliament, the Council and the Commission on budgetary discipline and sound financial management (see OJ C 139 of 14.06.06, p. 1).

[5] COM(1998)168 of 18.03.1998

[6] COM(2003)604 of 13.10.2003

[7] COM(2005)130 of 05.04.2005

[8] COM(2006)695 and SEC(2006)1460 of 16.11.2006