Select Committee on European Scrutiny Fourth Report


COM(01) 113

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

Legal base: Article 308; consultation; unanimity
Department: HM Treasury
Basis of consideration: Minister's letter of 24 October 2001
Previous Committee Report: HC 152-i (2001-02), paragraph 34 (18 July 2001)
To be discussed in Council: No date known
Committee's assessment: Politically important
Committee's decision: Cleared (decision reported 18 July 2001), but further information requested


10.1  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.

10.2  The proposed regulation makes two main changes to the existing facility:

    1  it reduces the ceiling on the loans from 16 billion euros to 12 billion euros; and

    2  it changes the facility so that it is financed exclusively through financial markets, removing the option of it being financed through contributions from Member States.

10.3  We cleared the document on 18 July 2001, but, in doing so, we requested further information on two points.

    —  we were 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; and

    —  we expressed our concern about Article 7 of the proposed regulation relating to debt and/or interest rate swaps. We asked to be reassured that the Commission had the legal authority to engage in such financial instruments and asked how the financial exposure to such potential losses would be recorded and managed.

The Government's view

10.4  The Economic Secretary to the Treasury (Ruth Kelly) has provided us with further information in letter of 24 October 2001. As regards reducing the loan ceiling from 16 billion euros to 12 billion euros, she says:

    "This reflects the reduction in the number of countries to whom the facility is now available. The proposed change reflects the fact that the number of countries eligible to use the facility has, following the start of EMU, been reduced from 15 to 3 (UK, Denmark and Sweden). It is difficult to judge the exact needs of any one Member State, when using this facility. In its 1999 review of the facility, the Commission noted that 'the maximum recourse of these ... countries to the facility is unpredictable'. They also noted that even with a _l6bn ceiling, the simultaneous needs of several Member States could probably not be met. For example, when the facility was last used in January 1993, _8bn was granted to Italy in four installments. The proposal maintains a _l2bn ceiling, which the Commission believes would cover the needs of any one 'out' Member State (or any of the accession countries). We believe that the reduction in the loan ceiling is justified."

10.5  As regards our concern about the Commissions's involvement in debt and interest rate swaps, she says:

    "Member States — including the UK — agreed that this legislation was not the appropriate vehicle with which to specify the financial instruments available to the Community. As a result all references to swaps transactions have been removed. It is therefore clear that the Commission's legal authority to engage in swaps transactions is a separate matter to that of the legislation on the Medium Term Assistance Facility. Officials are pursuing with the Commission the question of the Commissions's legal authority to engage in swaps transactions. We will notify the Committee of any developments on this issue. The Committee also raised the question of recording and monitoring financial exposure of swaps transactions. The recording of these transactions is covered in Volume 4, Chapter 4 of the Commission's annual accounts: 'Commitments not included in the balance sheet — potential liabilities'."

10.6  The Minister also informs us that the UK's request that the text be amended so that references to "member states with a derogation" be replaced with "member states which have not adopted the euro" has been agreed to. Finally, the Minister informs us that the minor proposal to transfer responsibility for the administration of the loans from the European Central Bank (ECB) to the Commission has been dropped.


10.7  We welcome the further information. While we understand the Minister's arguments for reducing the loan ceiling, we hold to our view that the reduction is unnecessary given the prospect of EU enlargement, especially if financial conditions become more volatile.

10.8  As regards our concern about Article 7 of the proposed regulation relating to debt and/or interest rate swaps, we welcome the recognition that this legislation was not the appropriate vehicle with which to specify the financial instruments available to the Community and the fact that all references to swaps transactions have been deleted.

10.9  As regards the Commission's legal authority for engaging in swaps, the Minister says that her officials are pursuing this point with the Commission. We look forward to receiving information on this as soon as possible.

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Prepared 14 November 2001