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
