Select Committee on European Communities Twelfth Report


Letter from the Rt Hon Kenneth Clarke, QC, MP, Chancellor of The Exchequer, to Lord Tordoff, Chairman of the Committee

  ECOFIN on 27 November 1995 asked the Commission and the European Investment Bank to consider jointly a new guarantee arrangement for the Bank in support of its external lending operations. The Commission's report (document 8793/96) to the Council of 27 June 1996 fulfilled the ECOFIN remit. An Explanatory Memorandum from my Department was submitted to the Committee on 12 September.

  Owing to the protracted negotiations on the guarantee question, my officials agreed with the Clerk to the Committee that I would write to you to report the outcome of Ministers' discussions. I regret that my colleagues on the ECOFIN Council have found it extremely difficult to reach agreement on an appropriate guarantee level for EIB external lending. The problem has also now been compounded by the need to renegotiate the EIB's external lending mandates which expire at the end of the year. This latter issue is the subject of a further Commission document, COM(96)586 final of 13 November. The document will I understand, be deposited in the House next week and will be supported by an Explanatory Memorandum. ECOFIN will be considering both issues again at its meeting on 12 December.

  The latest position is that ECOFIN on 14 October agreed (subject to a Spanish reserve, which has now been lifted) to a blanket guarantee from the Community of 65-75 per cent - the precise figure is still to be agreed. That the EIB should obtain non-sovereign guarantees on at least 25 per cent of total lending, to be increased insofar as the market permits on a case-by-case basis; and the maintenance of the existing provisioning rates (15 per cent at present) to the Loan Guarantee Reserve from the Community Budget. The Commission adopted on 14 November a proposal for four of the EIB's external lending mandates (Asia and Latin America, Mediterranean, Central and Eastern Europe, and South Africa) for 1997-99. The main outstanding issues, which I hope will be resolved on 12 December, are the overall value of the mandates, the distribution of lending between regions, the precise level of the guarantee, and the amount to be set aside for macro-financing assistance.

9 December 1996

Letter from Lord Tordoff, Chairman of the Committee, to the Rt Hon Kenneth Clarke, QC, MP, Chancellor of the Exchequer

  Thank you for your letter of 9 December concerning discussions on the above matters relating to the European Investment Bank. I am grateful to you for keeping the Committee informed of negotiations and I have passed on your letter to Sub-Committee A.

11 December 1996

Letter from the Rt Hon Kenneth Clarke, QC, MP, Chancellor of the Exchequer, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 11 December. I thought that your Committee might find it helpful to have further clarification of the Government's position with regard to the level of guarantee covering the EIB's external lending from the Community Budget.

  The Government is concerned both at the overall level of EIB external lending and at the level of potential exposure of the Community Budget if the guarantee rate is set at a particular level. Both are very closely linked. Recent years have seen an inexorable rise in the level of EIB external lending. This increases the risk borne by the Community Budget (or the Member States, in the case of lending to the ACP countries). The guarantees provided by the Budget are "global" - i.e., they apply to entire mandates not to each particular loan. So reducing the guarantee level from 100 per cent to 65-85 per cent, as now proposed, would in practice not reduce the risks faced by the Budget, since it is inconceivable that over 65-75 per cent of the lending would be subject to default. Lowering the guarantee level on this basis, therefore, simply permits more lending. That is why we have argued that any reduction in the guarantee level should be accompanied by a reduction in the risk falling on the Community Budget. We have now secured a useful step in this direction by getting agreement that the EIB should aim to find alternative sources of guarantee for the commercial risks on 25 per cent of its external lending.

  I hope that you find this explanation helpful.

22 January 1997

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