Compromise ahead for loan guarantee fund rules

Date: 26/10/1995

A PROTRACTED dispute over how to protect the European Union's budget from default on external loans could well be settled by the next meeting of EU finance ministers in November.

The loan guarantee fund, introduced three years ago to instil some discipline into the Union's growing taste for lending abroad, will hit its ceiling by 1997. If nothing is done, the EU will be 600 million ecu short of lending power within two years.

Under fund rules, the maximum amount of loans would not be able to exceed 2.3 billion in 1995 and 2.54 billion in 1999, while existing commitments would be over 2.8 billion ecu.

Finance ministers agreed this week to reduce the budget guarantee which underwrites loans made by the European Investment Bank (EIB) in 60 non-EU countries, giving the fund more room to manoeuvre.

The EIB lent 2.25 billion ecu in 60 countries in 1994, with the main recipients being African, Caribbean and Pacific countries (ACP) and non-member Mediterranean countries.

At the moment, the EIB benefits from 100&percent; 'global' guarantees for default on repayments, but finance ministers are proposing to reduce this to 75&percent;.

Council working groups and Coreper, the committee of member states' permanent representatives to the Union, will be responsible for drafting a compromise.

With a December meeting of finance ministers dependent on progress made in drawing up a plan for the transition to a single currency, the possibilities of an agreement at the 27 November meeting are growing.

“There were signs on Monday that ministers are prepared to find a compromise,” an official said. “A large majority agrees that we must find a solution soon so we will be ready to establish the new guarantees for Eastern Europe and the Mediterranean in the spring.”

Member states still have to agree whether the loan guarantees given to the bank should be 'global' and cover the EIB against default on repayments from a whole country, or cover its exposure on a particular project.

EIB President Sir Brian Unwin told ministers that he prefers global guarantees on bank loans because many of the projects funded reflect, at least in part, EU political objectives.

A project-by-project guarantee would increase EIB's risk exposure considerably, a prospect welcomed by some ministers who want to see the EIB faced with more market pressure.