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Balance of Payments

The EU is empowered by the EU Treaty to adopt borrowing programmes to mobilise the financial resources necessary to fulfill its mandate.

What is balance-of-payments assistance?

The EU can provide mutual assistance to non-euro area Member States when a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments. Balance-of-payments (BoP) assistance is designed to ease a country's external financing constraints. This can take the form of medium-term financial assistance.

Although the framework of medium-term financial assistance allows providing loans solely by the EU, in recent practice the assistance has usually been extended in co-operation with IMF and other international institutions or countries.

Legal base

The possibility of granting mutual assistance to a Member State with difficulties as regards its balance of payments is laid down in Article 143 of the Treaty. The facility to provide medium-term financial assistance has been established by Council Regulation (EC) No 332/2002.

How does it work?

1. Member State request and Council decision

The Member State with difficulties addresses itself to the Commission and Member States, when seeking medium-term financial assistance. The Member State in need presents a draft adjustment programme - designed to achieve a sustainable balance of payments position - in support of its application. The request, backed by the adjustment programme, is discussed within the relevant EU bodies and, if applicable, with other creditors.

When it is considered that a Member State is in difficulty or is seriously threatened with difficulties as regards its balance of payments, the Council, based on a recommendation by the Commission, takes a decision whether to grant mutual assistance.

When it is considered that this should take a form of medium-term financial assistance, the Council decides (usually in the course of the same meeting), on the basis of a Commission proposal and following an examination of the draft adjustment programme presented by the Member State concerned:

  • whether to grant a loan or appropriate financing facility, its amount and average duration (normally about five years), as well as technicalities for disbursing the loan or financing facility;
  • the economic policy conditions attached to the medium-term assistance.

2. Memorandum of Understanding and loan agreement

On the basis of these decisions, the Commission and the Member State concerned conclude a Memorandum of Understanding (MoU) and the Loan Agreement. The MoU specifies economic policy conditions that the Commission, in collaboration with the Economic and Financial Committee and other programme partners, in particular the IMF, shall verify prior to a decision on the release of any further instalment. The Loan Agreement includes the technicalities of the borrowing process and the detailed financial conditions of the loan.

Economic policy conditions usually involve an agreed path of fiscal consolidation, governance measures (for example, reform of taxation and tighter spending controls at all levels of government), as well as financial sector stabilisation measures (for example, additional banking regulatory requirements) and structural reform measures to improve business environment and support growth (for example, increasing administrative capacity to absorb EU funds more effectively). In addition, conditions are included regarding safeguards against fraud. This is particularly important given that the default risk of these loans is ultimately borne by the Member States.

3. Disbursement and regular review

Following signature of the MoU and the Loan Agreement, and a request for disbursement by the national authorities, fund-raising on international markets takes place and first payment tranche is released. Subsequent instalments of the loan are released once the EU institutions have assessed the Member State's compliance with the programme conditions. Reviews are undertaken at regular intervals to ensure that the economic policies of the Member State receiving Community loan comply with the adjustment programme and the previously agreed conditions. Changing economic environment can necessitate modifications and amendments to previously adopted documents.

Financing aspects of balance-of-payments assistance

The funds to be extended to Member States experiencing external financing constraints are raised by the European Commission on behalf of the EU on international financial markets. For each programme there is a planned disbursement schedule attached, which is agreed by all programme partners and corresponds to the estimated financing need of the country. The schedule is subject to modification to be consistent with developments under the programme.

‘AAA’ loan rates obtained by the EU on international financial markets at the moment of fund-raising are passed on to the Member States in need without adding any additional margin. They are among the most favourable rates available globally. For comparison, IMF’s market-related interest rate, known as the “rate of charge”, is based on the SDR interest rate and includes a margin; additional surcharges are applied on high, in relation to the country's quota, levels of outstanding credit.

The total outstanding amount of loans to be granted to Member States under the medium-term financial assistance facility is limited to €50 billion in principal. The maximum amount has been increased in response to the financial crisis, to €25 billion in December 2008 and further to €50 billion in May 2009 (from €12 billion before).

Overview of ongoing balance-of-payments assistance programmes

*Click on the country's name for a detailed overview of the programme

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