Explanatory Memorandum to COM(2001)113 - Facility providing medium-term financial assistance for Member States' balances of payments (COM(2001) 113 final — 2001/0062(CNS)) - Main contents
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| dossier | COM(2001)113 - Facility providing medium-term financial assistance for Member States' balances of payments (COM(2001) 113 final — ... |
|---|---|
| source | COM(2001)113  |
| date | 09-03-2001 |
The present facility providing medium-term financial assistance for Member States' balances of payments was established by Council Regulation (EEC) No 1969/88 of 24 June 1988, which merged two Community financial mechanisms, namely the machinery for medium-term financial assistance i and the Community loan mechanism designed to support the balance of payments of Member States, i into a single facility providing medium-term financial assistance.
On 16 June 1997 the European Council adopted a resolution on the establishment of an exchange-rate mechanism in the third stage of economic and monetary union. This mechanism will make it possible to ascertain whether the Member States wishing to adopt the euro after 1 January 1999 have met some of the convergence criteria spelt out in Article 121 of the Treaty. The European Central Bank and the national central banks of the Member States not belonging to the euro area concluded an agreement on 1 September 1998 laying down the operating procedures for an exchange-rate mechanism in the third stage of economic and monetary union.
The facility may be activated by the Council, either on the initiative of a Member State experiencing, or seriously threatened with, difficulties as regards its balance of current payments or capital movements or on the initiative of the Commission pursuant to the role conferred on it under Article 119 of the Treaty, which remains in force during the third stage of economic and monetary union for the Member States with a derogation. i
After examining the situation in the Member State concerned, the Council may decide whether to grant a loan or appropriate financing facility, its amount, its average duration, the techniques involved in providing it, and the economic policy conditions attached to medium-term financial assistance. Any full or partial financing of medium-term financial assistance by recourse to the Member States is also decided by the Council. The financial assistance facility makes it possible not only to grant substantial financial assistance rapidly but also, because of the conditions attached to it, to boost the confidence of financial markets in the ability of the country concerned to return to a sounder situation.
Since the entry into force of the Council Regulation of 24 June 1988, the single facility has been activated twice for two different Member States. On the first occasion, in 1991, a EUR2.2 billion loan payable in three tranches was granted (only the first tranche of EUR1 billion was released). On the second occasion, in January 1993, the Council decided to grant a EUR8 billion loan to be paid in four tranches (only the first two tranches each of EUR2 billion were released).
Under Article 12 of the present Regulation, the Council has on several occasions since 1988 examined, on the basis of a report from the Commission, after the Economic Financial Committee i had delivered an opinion and after consulting Parliament, whether the facility still met, in its principle, arrangements and ceiling, the need which led to its creation.
When the Commission report on the financial assistance facility was examined in October 1997, the Council adopted conclusions to the effect that the facility still met the need that had led to its creation and that the matter should be reviewed in the light of the third stage of economic and monetary union. i
In its November 1999 report i to the Council and Parliament concerning the review of the single facility providing medium-term financial assistance for Member States' balances of payments, the Commission took the view that the facility should be retained, although the option whereby loans granted under the facility could be financed in full or in part by the other Member States should be discontinued and the present ceiling of EUR16 billion reduced to EUR12 billion.
In its opinion i of 14 July 2000 on the Commission's report, the Economic and Financial Committee stated that it agreed with the views expressed by the Commission in its conclusions.
In its examination i of the Commission's report, Parliament was in favour of retaining the facility and amending the legal reference framework for it in order to take account of the start of the third stage of economic and monetary union. It expressed its support for the Commission's recommendation to reduce the present loan ceiling from EUR16 billion to EUR12 billion and called on it to look into the possibility of creating an appropriate facility providing financial assistance for the balances of payments of the applicant countries that could be incorporated in the pre-accession strategy.
The Council examined the financial assistance facility in the light of the Commission's report and the opinions delivered by the Economic and Financial Committee and Parliament. It formulated its conclusions at its meeting on 14 December 2000. It was in favour of retaining the facility and adapting the legal reference framework. It also felt that the present Regulation, which provides for exclusive recourse to the capital market for financing loans granted under the facility, should be amended and the ceiling reduced from EUR16 billion to EUR12 billion. It called on the Commission to present in due course a proposal amending Regulation (EEC) No 1969/88 accordingly.
Article 1 incorporates the following amendments:
- since the start of the third stage of economic and monetary union (1 January 1999), only the Member States with a derogation regarding their participation in economic and monetary union may still benefit from the mechanism;
- given the substantial reduction in the number of Member States eligible for the facility, the loan ceiling is reduced from EUR16 billion to EUR12 billion;
- given the development of financial techniques used on capital markets and by financial institutions and in view of the desire to obtain a more advantageous cost of financing for the beneficiary Member State, the Commission's remit should be extended to debt and/or interest-rate swaps.
Article 2 is now specifically concerned with the Member States with a derogation and spells out one of the roles taken on by the Economic and Financial Committee with a view to implementing the facility (this Committee replaced the Monetary Committee at the start of the third stage of economic and monetary union, as stipulated in Article 114 i of the Treaty).
Articles 3 and 4 clarify how the facility is to be implemented, with due account being taken of the new Treaty numbering introduced since the ratification of the Amsterdam Treaty.
Article 5 spells out the respective roles of the Commission and the Economic and Financial Committee in verifying the economic policy measures that have to be taken by the Member State in receipt of a Community loan.
Article 6 introduces the principle of compatibility between loans granted under the facility and the very short-term financing facility that may be activated by the European Central Bank. The latter facility was established by the Agreement of 1 September 1998 laying down between the European Central Bank and the national central banks of the Member States not belonging to the euro area the operating arrangements for an exchange-rate mechanism during the third stage of economic and monetary union.
Article 7 lays down the facility's borrowing and lending arrangements and supplements those already provided for by Regulation (EEC) No 1969/88 as follows:
- Article 1 of the present proposal provides for the Commission's remit to be extended to debt and/or interest-rate swaps. If, in order to obtain a more advantageous cost of financing, the Commission opts to transform borrowings it makes by means of debt and/or interest-rate swaps, a commercial risk is introduced into the loan financing operation. This commercial risk stems exclusively from the default risk on the part of the counterparty to the swap concluded by the Commission. It is to be noted that the risk is greater when swap operations involve an exchange of capital (foreign-currency swap) than when they include only an interest-rate swap.
In order to minimise this risk for the European Community, the swap counterparties are carefully selected by the Commission on the basis of an analysis of their credit risk (in terms of solvency and liquidity) by specialised rating agencies (e.g. Standard&Poor's and Moody's). On the basis of the analyses by these highly regarded international agencies, the Commission selects only swap counterparties with a top-notch credit rating;
- Under Article 3 i of the Regulation, the Council decides whether to grant a loan or appropriate financing facility, its amount and its average duration and the size of the successive instalments that will allow the beneficiary Member State to draw down the aggregate amount. The formulation of these arrangements by the Commission leaves some room for manoeuvre as regards the characteristics of the loan instalments, and in particular the currency, maturity and type of interest rate.
When it wishes to draw down an instalment of the aggregate loan granted to it by the Community under the facility, the beneficiary Member State may notify the Commission of its desiderata regarding the aforementioned characteristics and the Commission will see to it that the financing provided corresponds as closely as possible to those desiderata. However, if the desiderata appear inappropriate or impossible to satisfy given the technical constraints imposed by the markets, the Commission reserves the right to inform the beneficiary Member State of this and to propose alternative financing solutions.
Article 8 lays down the method for calculating the amounts to be set off against the ceiling for loans granted under the facility.
Article 9 spells out the decision-making process for loans to be granted under the facility.
Article 10 entrusts administration of the loans to the Commission.
In Regulation (EEC) No 1969/88, the European Monetary Cooperation Fund was entrusted with the administration of these loans. With the start of the second stage of economic and monetary union, it was dissolved under Article 117 i of the Treaty and its tasks taken over by the European Monetary Institute (EMI), itself established by that article.
Article 123 i stipulates that, as soon as it is established, the European Central Bank is, if necessary, to take over the tasks of the EMI, which is to go into liquidation at the same time. Under this provision, the European Central Bank is now responsible for administering loans granted under the facility. Being essentially administrative in nature, this task is not one of the essential tasks that have been assigned to the European Central Bank. Accordingly, in the interests of simplification and efficiency (the corresponding loans being managed by the Commission on behalf of the European Community), it is recommended that the administration of loans also be entrusted to the Commission.
Article 11 lays down the frequency with which the Commission will produce a report intended to verify whether the facility established still meets, in its principle, arrangements and ceilings, the need that led to its creation. The differences with Regulation (EEC) No 1969/88 are the following:
- whereas the Regulation fixed the date on which the first Commission report on the facility was to be produced, it was the Council that fixed the dates of the subsequent reports. It seems more expedient to lay down in the Regulation the frequency at which the Commission reports will be produced in future;
- the Regulation currently stipulates that the Commission report on the facility is to be the subject of an opinion from the Economic and Financial Committee and consultation by Parliament before the Council can undertake its examination. Given the essentially technical nature of the Commission report, there should, for reasons of efficiency, be only the consultation of the Economic and Financial Committee before the report is presented to the Council.
Article 12 repeals Regulation (EEC) No 1969/88.