Select Committee on European Scrutiny First Report


FINANCIAL ASSISTANCE FOR BALANCE OF PAYMENTS PURPOSES


(22246)
6974/01
COM(01) 113

Draft Council Regulation establishing a facility providing medium-term financial assistance for Member States' balance of payments.


Legal base: Article 308 EC; consultation; unanimity
Document originated: 7 March 2001
Forwarded to the Council: 9 March 2001
Deposited in Parliament: 28 March 2001
Department: HM Treasury
Basis of consideration: EM of 9 April 2001
Previous Committee Report: None
To be discussed in Council: None planned
Committee's assessment: Politically important
Committee's decision: Cleared, but further information requested

Background

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.

The document

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 rate swaps.[55] 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.'"

Conclusion

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


 
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