FINANCIAL ASSISTANCE FOR BALANCE OF PAYMENTS
Draft Council Regulation establishing a facility providing medium-term financial assistance for Member States' balance of payments.
||Article 308 EC; consultation; unanimity
||7 March 2001|
|Forwarded to the Council:
||9 March 2001|
|Deposited in Parliament:
||28 March 2001|
|Basis of consideration:
||EM of 9 April 2001
|Previous Committee Report:
|To be discussed in Council:
||Cleared, but further information requested
34.1 The Facility Providing MediumTerm
Financial Assistance for Member States' Balance of Payments was
established by Council Regulation (EEC) No. 1969/88 of 24 June
1988. The facility was established to help Member States experiencing,
or threatened with, difficulties in their balance of current payments
or capital movements. The facility is one of a range of borrowing
options from various sources that are potentially available to
countries during times of financial turmoil. It has been used
twice. On the first occasion, in 1991, a 2.2 billion euros loan
payable in three tranches was granted to Greece. In the event,
only the first tranche of 1 billion euros was released. On the
second occasion, in January 1993, the Council decided to grant
an 8 billion euros loan to be paid in four tranches to Italy.
On that occasion, only the first two tranches, each of 2 billion
euros, were released.
34.2 Under the facility, financial assistance
may be provided on the initiative either of a Member State, or
of the Commission under Article 119 EC. The terms of any assistance,
including any conditions, are decided by the Council.
34.3 Since the launch of the single currency
on 1 January 1999, the facility has been available only to the
three Member States that have not adopted the single currency:
the United Kingdom, Sweden and Denmark.
34.4 A review of the workings of the facility
was published in November 1999 and was considered by the previous
Committee in its report of 19 January 2000. Following discussions
within the Economic and Financial Committee (ECOFIN), the European
Parliament in December 2000 called upon the Commission to present
a proposal amending Regulation (EEC) No. 1969/88. The Parliament
proposed that the facility should be retained, but that loans
provided by individual Member States under the facility should
be discontinued and that the present ceiling of 16 billion euros
be reduced to 12 billion euros.
34.5 The proposed regulation makes two main changes
to the existing facility:
- to reduce the ceiling on the loans from 16 billion
euros to 12 billion euros;
- to change the facility so that it is financed
exclusively through financial markets, removing the option of
it being financed through contributions from Member States.
34.6 The Commission justifies the first change
by the reduction since the launch of the single currency in the
number of countries to which the facility is available.
34.7 The second change reflects the way the facility
has operated in recent years, specifically that, except for one
loan made in 1974 under a previous arrangement, all loans have
been financed through capital markets or financial institutions,
rather than through contributions from Member States.
34.8 Article 7 of the proposed regulation allows
the Commission's remit to be extended to debt and/or interest
The Commission notes that in order to minimise the risk for the
European Community, swap counterparts will be carefully selected
by the Commission on the basis of an analysis of their credit
risk rating. The Commission will only select swap counterparts
with a "top-notch credit rating".
The Government's view
34.9 In his Explanatory Memorandum of 9 April
2001, the then Financial Secretary to the Treasury (Mr Stephen
Timms) told us:
"The Government agrees
that this facility should be retained. Although no Member States
have used it since 1993, the possibility that it might be needed
in the future cannot be ruled out. The facility might also prove
useful for any new Member States of the EU which does not participate
in the single currency.
"The specific proposals reducing the ceiling
for loans to 12 billion euros and to restrict the financing of
the facility to capital markets are justified."
34.10 The Minister notes that, as drafted, the
terms of the proposed legislation imply that the UK would not
be able to make use of the facility.
"The draft refers to
'Member State(s) with a derogation' only, whereas the UK has a
similar, but separate status defined under Protocol No. 11 (Protocol
on certain provisions relating to the United Kingdom of Great
Britain and Northern Ireland). As such, and to ensure the facility
is available to the UK, the UK is seeking to replace references
to 'Member States with a derogation' with 'Member States which
have not adopted the single currency.'"
34.11 We agree that the facility should be
retained for all Member States that have not adopted the single
currency, including the UK, and that the text should be amended
accordingly. However, we are doubtful about the case for reducing
the loan ceiling, given that the facility will be available to
new Member States, some of which could face volatile financial
market conditions in the period between accession and adoption
of the single currency. We are also concerned about Article 7
of the proposed regulation relating to debt and/or interest rate
swaps. We wish to be reassured that the Commission has the legal
authority to engage in such financial instruments and about how
the financial exposure to such potential losses will be recorded
and managed. We clear the document in the meantime, but request
further information on these points.
55 An interest rate swap is a contract in which two
parties agree to swap a stream of interest rate payments of a
predetermined period. A common example, is where one party agrees
to pay a fixed rate of interest in return for receiving a rate
based on a floating-rate. Swaps allow borrowers to speculate and
hedge risks associated with interest rate volatility. Back