Explanatory Memorandum to COM(2022)557 - Exceptional macro-financial assistance to Ukraine, reinforcing the Common Provisioning Fund by guarantees by the Member States and by provisions for financial liabilities - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)557 - Exceptional macro-financial assistance to Ukraine, reinforcing the Common Provisioning Fund by guarantees by the Member ... |
|---|---|
| source | COM(2022)557  |
| date | 07-09-2022 |
Contents
- CONTEXT OF THE PROPOSAL
- a.Higher loss absorption capacity commensurate with higher credit risk
- b.Need to establish the required budgetary cover through Member State guarantees
- c.Maximising synergies between EU provisioning and Member State guarantees
- d.Coverage of interest rate costs from the EU budget
- e.Application of a higher provisioning rate to repurposed ELM loans disbursed in Q3 2022 and ELM loans yet to be disbursed
- f.Review of provisioning needs for MFA and ELM loans
- Not applicable
·Reasons for and objectives of the proposal
This proposal seeks to enable the EU to provide further exceptional macro-financial assistance (MFA) to Ukraine of EUR 5 billion in loans, while equipping the EU budget with the means to absorb the risk of losses on these additional loans and on the EUR 1 billion MFA loan adopted on 12 July 2022. In addition, it also seeks to extend the same budgetary protection for the disbursement of already signed External Lending Mandate (ELM) loans to the Ukrainian authorities and Ukrainian state-owned entities after 15 July 2022.
·General context
The EU’s support for Ukraine is embedded in a strong long-term relationship. Ukraine has been developing a strong partnership with the EU since 2014, going beyond mere bilateral cooperation to evolve towards gradual political association and economic integration. The EU-Ukraine Association Agreement (AA), which entered into force on 1 September 2017 and includes a Deep and Comprehensive Free Trade Area (DCFTA), has been the main tool for bringing Ukraine and the EU closer together. In addition to promoting deeper political ties, stronger economic links and respect for common values, the Agreement has provided a solid framework for pursuing an ambitious reform agenda, focused on the fight against corruption, an independent judicial system, the rule of law, and a better business climate. The EU has shown continuous support for Ukraine’s significant structural reforms, which are crucial for attracting investments, boosting productivity and raising the standards of living in the medium and longer term. Following the country’s application for EU membership and the granting of candidate country status, cooperation with Ukraine is set to deepen further as the country moves forward on its European path 1 .
Ukraine’s long-term economic development and focus on reform orientation of Ukraine face very significant challenges since Russia invaded the country on 24 February 2022 in an unprecedented act of unjustified and unprovoked aggression. In addition to the human suffering, the on-going Russian war of aggression against Ukraine has caused considerable damage to the country’s physical infrastructure (roads, bridges, factories, etc.) and its residential and communal buildings (housing units, schools, hospitals, etc.). The fighting has also caused a massive human exodus, with more than 8 million internally displaced persons and more than 6 million refugees. The estimates of the overall impact on the economy, in terms of loss of output in 2022 and foregone future production due to the destruction of capital and the migration of labour, range in the hundreds of billions. In 2022 alone, Ukraine’s GDP is expected to fall by between 30% and 50%, which would mean a further loss of more than EUR 100 billion, in addition to the destruction of physical capital.
In addition to inflicting massive damage to the economy, Russia’s war of aggression against Ukraine has caused the sovereign to lose access to the international capital markets. The resulting underlying balance-of-payments funding gap was estimated by the authorities and the International Monetary Fund (IMF) in June 2022 to reach around USD 39 billion for the whole of 2022. In the IMF’s initial assessment, Ukraine could finance USD 9 billion of this gap through a safe draw-down on its official international reserves that would not threaten its macro-financial stability 2 .
Bilateral and multilateral commitments of financial support pledged to Ukraine in the context of the G7 Finance Ministers and Central Bank Governors meeting in Petersberg on 18-20 May have reached almost USD 20 billion. While these commitments are crucial to support the functioning of the Ukrainian state, even their full and prompt disbursement would mean an uncovered residual gap of around USD 10 billion of the funding needs estimated by the IMF. The release of a sizeable part of the remainder of the exceptional MFA would provide an additional significant relief and help cover part of this shortfall.
Reflecting the sizeable gap between commitments and disbursements, among other issues, the country’s international reserves decreased by the equivalent of USD 8.5 billion in the first 7 months of 2022 and stood at around USD 22.3 billion by the end of July (covering around 3.5 months of future imports), thus leaving only very limited buffers for drawing down reserves for the remainder of the year (with USD 20 billion often seen as a critical level of reserves needed to ensure macroeconomic stability in the country). In this increasingly challenging context, on 21 July, the Ukrainian central bank (NBU) devalued the hryvnia by 25% against the US dollar, while keeping the fixed exchange rate regime. This step has been accompanied by additional measures to minimise the demand for foreign currency 3 .
Ukraine also launched, on 21 July, a formal consent solicitation on the suspension of its commercial debt service at least until the end of 2023. This debt service suspension initiative, which was welcomed and backed by an intention to do the same by key bilateral official creditors, notably the Group of Creditors of Ukraine 4 . It provides for an important contribution to help Ukraine manage its liquidity and is expected to provide further budgetary relief.
On the EU side, many Member States have provided grants and pledged further loans and guarantees, either bilaterally or through international financial institutions. Bilateral loans provided to date by EU Member States are concessional in nature and contain a considerable grant element when applying the established OECD methodology for the calculation of the grant element of official development aid.
The EU itself has provided EUR 2.2 billion to Ukraine in the form of MFA loans in the course of 2022. EUR 1.2 billion of emergency MFA was disbursed in March and May and a further EUR 1 billion of exceptional MFA was disbursed on 1 and 2 August 5 . The latter is the first part of the exceptional MFA support of up to EUR 9 billion that was announced in the Commission’s 18 May Communication on Ukraine Relief and Reconstruction and endorsed by the European Council on 23-24 June 2022. Faced with the large overall funding gap, the EU has announced its determination to make a sizeable contribution towards financing Ukraine’s remaining funding needs for the whole of 2022. The urgency for releasing significant funds by the end of the year is further underscored by the limited flow of international financial support pledged for the fourth quarter. 6
Following the call from the European Council of 23-24 June and given the urgency of Ukraine’s short term funding needs, the European Commission presented a first proposal for exceptional MFA of up to EUR 1 billion, which was fully disbursed in two tranches on 1 and 2 August 2022. To make progress with the delivery of that exceptional support package, the European Commission presents this proposal for a further exceptional MFA of EUR 5 billion in loans to Ukraine. The remaining up to EUR 3 billion of the announced exceptional MFA of up to EUR 9 billion will be provided as soon as possible.
In addition to the provision of direct support, the European Commission agreed in July 2022 to the repurposing of EUR 1.59 billion in undisbursed loans provided under the External Lending Mandate (ELM), of which EUR 1.05 billion is to be disbursed by the EIB during the third quarter of 2022 as support for the Ukrainian authorities and EUR 536 million of EIB loans to be disbursed at a later stage with the purpose of resuming selected projects. This comes in addition to the EUR 668 million that the Commission and EIB had already agreed to repurpose in March 2022 and which was disbursed within 1 month of the start of Russia’s war of aggression.
The MFA loans and repurposed ELM loans come in addition to many other types of support by the EU, notably humanitarian aid, development and defence assistance, the suspension of all import duties on Ukrainian exports for 1 year and other solidarity initiatives, e.g. addressing transport bottlenecks so that exports, in particular of grains, could be ensured. 7
Moreover, this extensive programme of EU support is part of the extraordinary international effort by bilateral donors and international financial institutions to support Ukraine at this critical juncture, and on its way to longer-term reconstruction.
Finally, in light of the elevated risk of financial exposures to Ukraine, this proposal clarifies the budgetary means that are needed to underpin the granting of additional exceptional MFA loans for an amount of EUR 5 billion and the disbursement of repurposed ELM loans.
·Main elements of this proposal
Exceptional nature of this MFA operation
Given the unprecedented circumstances of the Russian war of aggression against Ukraine, this exceptional MFA differs from regular MFA operation by offering increased flexibility in several respects. The concessional nature of the assistance is strengthened through a higher average maturity of the loans of up to 25 years and the possibility for the EU budget to cover the interest rates and administrative fee payments. In addition, in the current context and unlike regular MFA operations, the proposed exceptional MFA of up to EUR 5 billion is not formally linked to a disbursing IMF programme.
A Memorandum of Understanding (MoU), to be agreed with the Ukrainian authorities, presents the details related to the release of the loan instalments. In addition to selected policy conditions to which disbursements under this second part of the exceptional MFA to Ukraine will be linked, this MoU will also require the use of the reporting systems set up in the context of the first part of the exceptional MFA. The selected policy measures to which the disbursement of the assistance is linked will be both relevant to the most critical issues and proportionate to what could be achieved at the current juncture in light of the ongoing Russian war of aggression against Ukraine. Through the reporting system, the future MoU would emphasise enhanced transparency and accountability regarding the use of budgetary resources (including the funds received under this assistance). It could also include needs’ assessments to be addressed, in particular of critical infrastructure such as roads, railways, hospitals, schools, and housing. The policy actions to improve the country’s resilience and stability, in the area of governance and rule of law, and in the energy sector from the EUR 1.2 billion emergency MFA, disbursed in March and May 2022, and that have not been completed due to force majeure, could also be considered, where appropriate 8 .
Budgetary and risk management considerations
This package of exceptional MFA loans must take into account the size and heightened risk profile of EU exposures to Ukraine, as well as the particular constraints faced by the EU budget at the current juncture. It is however also envisaged that the loans will be provided on highly concessional terms (average maturity of up to 25 years), while also offering short-term relief to the Ukrainian State by relieving it of the burden to make interest rate repayments – at least for the current Multiannual Financial Framework (MFF). Taking these various considerations into account, this proposal reflects the following features:
Similar to the recent European Parliament and Council Decision adopting exceptional MFA of up to EUR 1 billion in loans 9 , the proposed package of loans to Ukraine under the present circumstances presents elevated risks of potential non-repayment compared to standard MFA loans. The provisioning rate of 9% that is generally applied to countries facing a balance-of-payment crisis is not adequate following Russia’s war of aggression. Having considered the challenges facing Ukraine and the probability of incurring losses, this proposal envisages that a budgetary cover of 70% is needed to insure the EU budget against future contingencies. This high rate of provisioning is currently considered necessary to contain the risk implied by this additional exceptional MFA to Ukraine, in line with the principles of sound financial management.
On this basis, the 70% coverage represents a prudent and conservative risk mitigation policy which is needed to reassure investors that amounts invested in EU bonds which finance the exceptional MFA loans to Ukraine, will be repaid in full and on time.
The External Action Guarantee within the Neighbourhood, Development and International Cooperation Instrument – Global Europe has been designed to guarantee MFA operations of approximately EUR 11 billion overall, provisioned at the rate of 9%, given that MFA loans involve sovereign risk. On this basis, EUR 1 billion in provisions have been earmarked in the financial programming for MFA operations to third countries from the funds provided in Article 31(5), third subparagraph of Regulation (EU) 2021/947.
The bulk of this provisioning has already been earmarked for MFA loans to Ukraine – including the emergency MFA loans of EUR 1.2 billion at 9% (EUR 108 million of provisions), and the recent exceptional MFA loan of EUR 1 billion at 70% (EUR 700 million of provisions). Consequently, the remaining EU budgetary resources are not sufficient to provide the budgetary cover needed to provision the additional loans of EUR 5 billion at 70% of their notional value.
The proposed new MFA loans can therefore only go ahead in a financially sound manner if Member States are willing to provide the additional budgetary coverage required. It is proposed that this coverage take the form of guarantees, with the amounts pledged by each Member State calculated on a pro-rata GNI basis. Through these guarantees, the EU can call on amounts needed to honour its repayment commitments to the bondholders, in the event and to the extent required to meet a shortfall in the Common Provisioning Fund (CPF) occasioned by a potential payment default by Ukraine. Member States would not need to provide upfront provisioning in cash and the call on the guarantees would occur only in the event of payment defaults by Ukraine were to have depleted the dedicated provisioning that is available in the CCPF. Guarantees are also an appropriate response given the contingent and uncertain nature of the potential losses. As indicated above, the loans would be structured in a way to maximise the chances that Ukraine has recovered sufficiently to allow it to honour its repayments in full.
The provision of Member States guarantees is a technique that has been used in the context of the Support to mitigate Unemployment Risks in an Emergency (SURE) Regulation 10 , as a basis for ensuring that the EU had sufficient budgetary capacity to absorb expected losses on its loans to Member States. However, unlike in the case of SURE, which was conditioned on all guarantees having entered into force, given the extreme urgency of Ukraine’s funding needs, the exceptional MFA loans to Ukraine could become available before the individual national guarantee agreements between the Commission and the Member States enter into force if there is a firm commitment among Member States that these are forthcoming as soon as possible.
In order to manage optimally situations where EU budgetary provisions and Member State guarantees may be called upon to ensure repayments to EU bond-investors, it is proposed to manage the recent exceptional MFA loan of EUR 1 billion, disbursed on 1 and 2 August 2022, and the additional loans of EUR 5 billion under this initiative as an integrated set of exposures for an amount of EUR 6 billion. By using this approach, the EU budget will provide a first-loss protection for 9 % of the full package of EUR 6 billion in loans. This would be reinforced by the Member State guarantees for a further 61% of the value of the loans.
Managing the two sets of loans of the exceptional macro-financial assistance together in this way has the following implications.
·The planned provisions from the EU budget to be used exclusively for meeting the EUR 6 billion of potential claims arising from new exposures related to Ukraine will amount to EUR 540 million. This sizeable amount (to be increased further by provisions for repurposed ELM loans – see below) will provide a significant buffer for managing repayment needs in the event that Ukraine is unable, temporarily or otherwise, to meet its payment obligations to the EU. A buffer of this size can serve as an effective first layer of protection in the event that Ukraine was to miss payments to the EU, and can delay the need to call on Member State guarantees. These provisions of EUR 540 million can be held in a dedicated compartment of the CPF. This would allow the release of EUR 160 million of provisions from the EUR 700 million already earmarked for the EUR 1 billion loan of the first part of the exceptional MFA package.
·To bring the budgetary cover to the required level of 70%, Member States should provide budgetary guarantees for the remaining 61% of the full package of EUR 6 billion of exceptional MFA loans. The volumes to be guaranteed by Member States would amount to a combined total of EUR 3.66 billion. These guarantees would be called upon only if the amounts held as provisions in the specific compartment of the CPF dedicated to MFA Ukraine were to have been depleted. Member States commit to provide resources unconditionally and immediately in response to a Commission request arising from a potential failure of Ukraine to meet its payment obligations. Since Member States do not provide cash up-front, the budgetary guarantees agreed by the Member States represent contingent liabilities. The guarantees are a second layer of protection for the investors in the EU bonds that finance the exceptional MFA loans.
This approach requires some minor changes to the text of the Decision (EU) 2022/1201 11 on the exceptional MFA loans of EUR 1 billion. This proposal presents these changes.
The EU budget may bear the interest rate costs arising from the July loan of EUR 1 billion under the current MFF, if requested by Ukraine and subject to availability of budgetary resources. By assuming the interest rate costs, the EU would provide additional financial relief to Ukraine and also confine and defer the risk of potential non-repayment of principal to the moment of loan expiry or potential default. The Commission could arrange a loan with a long maturity (average maturity would be 25 years) in order to provide as long a period as possible for Ukraine to return to growth, reconstruct its economy in line with its European path and maximise the chances of full repayment. By structuring the liabilities in this way, the European Commission can also try to alleviate the risk of calls for part or all of the Member State guarantees. To extend the same treatment to the interest rate costs implied by the additional EUR 5 billion of exceptional MFA loans, additional means need to be mobilised.
e.Application of a higher provisioning rate to repurposed ELM loans disbursed in Q3 2022 and ELM loans yet to be disbursed
Faced with Ukraine’s urgent financing needs, in July 2022 the European Commission agreed to repurpose EUR 1.59 billion in EIB ELM loans to Ukraine. 1.05 billion is to be disbursed by the EIB during the third quarter of 2022. The EIB plans to disburse another EUR 536 million in loans in 2022-23 in order to help finance the resumption of selected investment projects. However, as these are loans to the Ukrainian sovereign (or guaranteed by it), they embody the same level of risk as the exceptional MFA loans. Under the ELM Guarantee Agreements, the EIB has the right to call on the EU budget for up to the full amount of losses that it incurs on these loans under the ELM guarantee. It should therefore be clarified that the same precautionary approach should apply to these exposures and that relevant additional provisions should be put into a common compartment of the CPF dedicated to Ukraine. This proposal therefore envisages extending the 70% provisioning rate to these EUR 1.59 billion of additional exposure stemming from repurposed loans. Any further potential disbursements of repurposed ELM loans to Ukraine would be subject to the same provisioning rate (as periodically reviewed) and under the condition that budgetary resources are found for such provisioning.
The 70% provisioning for the EUR 1.59 billion ELM loans will be provided from the EU budget, they will be governed by the rules on provisioning of the Financial Regulation, not of GFEA and will be held in a separate CPF compartment.
It is proposed that unless the assessment of associated risks changes, any further disbursements of ELM loans to Ukraine be conditional on finding the budgetary resource to provision the exposures at 70% of their notional value taking into account the priorities of NDICI Global Europe Instrument.
The high level of provisioning in this proposal is warranted by the fact that Ukraine is currently dealing with the military, economic and social fall-out of a major armed conflict. If the military and economic situation of Ukraine stabilises or improves, this level of provisioning may no longer be required. This proposal therefore envisages a regular (6-monthly) review of this provisioning rate, commencing in mid-2023 or earlier if appropriate. This review will also apply to the provisioning for the EUR 1 billion loan that has been granted on the basis of Decision (EU) 2022/1201, 12 and to the exceptional provisioning of 70% held against the 1.59 billion EUR ELM repurposed loans (see below). In addition to this regular review, the Commission could re-assess the provisioning rate on an ad-hoc basis, in particular if justified by a notable relevant event.
(1)Implementation of MFA loans
The Commission will arrange to disburse instalments of the exceptional MFA loans as a matter of urgency after this proposal has been adopted and all formalities have been completed. These include in particular the (i) unequivocal and unanimous commitment by all Member States to conclude guarantee agreements, as quickly as their national procedures allow; and (ii) the signature of the MoU and the entry into force of the Loan Agreement.
This proposal envisages that the European Commission will proceed to arrange loans immediately after this Decision enters into force, subject to a clear and unequivocal commitment by all Member States that guarantees will be provided as swiftly as national procedures allow. Past experience has shown that while many Member States can provide guarantees within 2-3 months, it can take 4-5 months to receive the full set of guarantees. This would not be compatible with the objective of providing urgent support to Ukraine. The Commission therefore envisages – on an exceptional basis given the extreme nature of the situation – to arrange the loans while receiving the guarantees in parallel. In this particular case, the risk for the EU budget is mitigated given that no payment event (interest payment) is due for a prolonged period of time. In particular, no payment events will fall due during the interim period (4-5 months) before all guarantees have been received. In the theoretical case that non-payment events would occur in this interim period, the provisioning set aside in the CPF (and, if needed, temporary draw-down of other CPF compartments) can be mobilised to deal with any temporary shortfalls. The availability of the CPF provisioning means that there are cash resources available to ensure all payments owed to EU bond-investors, even if guarantees are not yet fully in place.
Therefore, the European Commission proposes to arrange the new MFA loans in a small number of instalments as swiftly as possible after entry into force of this Decision and finalisation of the related Loan Agreement. It is of utmost importance that all Member States provide the required budgetary guarantees as quickly as possible, and that there is a collective commitment to complete this process swiftly.
To deliver the full amount of up to EUR 9 billion of exceptional MFA as announced in the Communication on Ukraine Reconstruction and Relief of 18 May 2022, the European Commission is working with EU Member States on a sound and equitable mechanism for disbursing the remaining up to EUR 3 billion. Once the design has been completed, the Commission will swiftly move ahead with a proposal on the remaining amount of support.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Article 212 of the Treaty on the Functioning of the European Union is an appropriate legal basis for financial assistance granted by the Union to third countries. The unprovoked and unjustified military aggression by Russia requires granting of additional financial assistance to Ukraine. To reinforce the budgetary sustainability of these measures, it is also necessary to provide for a mechanism of guarantees by the Member States which will underpin the financial assistance. In the current circumstances, those guarantees are an indispensable accompanying part of the financial assistance.
• Subsidiarity (for non-exclusive competence)
The subsidiarity principle is respected as the objectives of restoring macro-financial stability in the short-term in Ukraine cannot be sufficiently achieved by the Member States alone and can be better achieved by the EU. The main reasons are the budgetary constraints faced at the national level and the need for strong donor coordination in order to maximise the scale and effectiveness of the assistance, while limiting the burden on the administrative capacity of Ukrainian authorities, which is very stretched in the current circumstances.
• Proportionality
The proposal complies with the proportionality principle: it is restricted to the minimum required in order to achieve the objectives of maintaining macro-financial stability in the short-term and does not go beyond what is necessary for that purpose.
As identified by the Commission based on the estimates by the authorities and confirmed by the IMF 13 , the amount of the proposed exceptional MFA, together with the already disbursed emergency MFA, corresponds at most to half of the estimated residual financing gap for 2022. This proportion is consistent with standard practices on burden-sharing for MFA operations (for a country with an Association Agreement, the upper limit would be 60% according to the ECOFIN Council conclusions of 8 October 2002), taking into account the assistance pledged to Ukraine by other bilateral and multilateral donors.
Member State guarantees, to be called upon only when required by exceptional circumstances, seems the most efficient solution from a financial perspective. It avoids having to find additional resources within the current MFF ceilings, where all amounts are currently fully deployed. It also avoids Member States having to provide additional funds ex ante but enables amounts to be called ex post if potential losses were to occur.
Member States will only be required to make resources available under this instrument in a restricted set of circumstances set out in the Decision. In particular, they will not have to make cash transfers to the EU immediately but only when conditions for guarantee calls are met. Given that repayments can be met in a first instance from the CPF provisions, calls on the guarantees are likely to be, if at all, rather infrequent and predictable.
• Choice of the instrument
Project finance or technical assistance would be neither suitable nor sufficient to address the broader macro-financial objectives of this exceptional MFA. The main added value of the exceptional MFA compared to other EU instruments is to alleviate the external financial constraints swiftly and to the extent required. It helps to ensure a stable macro-financial framework, including by promoting a sustained and more sustainable balance of payments and budgetary situation, within an appropriate framework for reporting requirements and policy conditions. By helping to ensure an appropriate overall policy framework, the MFA can increase the effectiveness of the measures financed in Ukraine under other, more narrowly-focused EU financial instruments. The impact on the country’s debt sustainability is lessened by setting up the operation in a highly concessional manner, with longer maturities and a subsidy to cover interest costs. Swiftly providing the much needed and very sizeable amount of financial support through the MFA’s highly concessional set-up for loans appears warranted, notably given the limits that he international community, including the EU, faces to provide substantial grant financing.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
Past ex-post evaluations of previous MFA operations to Ukraine have shown that in general they were highly relevant in terms of its objectives, financial envelope and policy conditions.
They proved crucial to support Ukraine in addressing its balance-of-payment problems and implementing key structural reforms to stabilise the economy and enhance the sustainability of its external position. They allowed for fiscal savings and financial benefits, and acted as catalyst for additional financial support and investor confidence. The MFA conditionality package was complementary with the related IMF programme and created a politically reinforcing effect that contributed to the mobilisation of Ukrainian authorities around essential reforms, especially in areas not covered by other international donor programmes.
There have been no recent reviews of the provisioning rates applied to the MFA and Euratom loan facility portfolios or the provisioning of the external lending mandate budgetary guarantee. The provisioning rate for the MFA under the External Action Guarantee was reconfirmed at 9% when Regulation 2021/947 (the NDICI-GE Regulation) was adopted. The NDICI-GE Regulation also lays down a maximum amount of provisioning for the entire External Action Guarantee 14 . A review of the provisioning of the macro-financial assistance is scheduled for 2024. While the MFA is a crisis instrument by nature, the risks of lending to a country at war goes far beyond the scenarios envisaged when the NDICI-GE was adopted. There is therefore a need to adopt tailored solutions to deal with the pressing situation at hand, based on available analysis.
• Stakeholder consultations
This exceptional MFA is provided as an integral part of the international support to Ukraine. In the preparation of this proposal, the Commission services have consulted with the IMF, the World Bank and other bilateral (including Member States) and multilateral donors, with significant macro-financial expertise, including as regards the Ukrainian economy. The Commission has also been in regular contact with the Ukrainian authorities.
• Collection and use of expertise
Commission services have based this proposal on a careful analysis, conducted in cooperation with the IMF and the competent international institutions, of the financial needs and broader macro-financial situation of Ukraine. This includes discussions on regular basis of the latest projections of the funding needs projections of Ukraine within international fora, e.g. the G7.
Commission services have also engaged in discussions with their counterparts in the risk departments of international financial institutions having extensive exposures in Ukraine. The purpose of these discussions has been to understand how those institutions will provision for and manage their exposures to Ukraine. These discussions have revealed the extent to which the institutional approach of each institution depends on how its balance-sheet is exposed to the impact of losses on the Ukrainian exposures. Some institutions benefit from full or partial counter-guarantees against their exposure or benefit from other forms of safeguard (reserves held by Ukraine at IMF). The situation of the EU, which has financed MFA loans through back-to-back lending, means that it is in the unique situation of having to ensure a steady and predictable stream of payments to its bond-investors according to a fixed and regular schedule in the event of defaulted payment flows from the loan beneficiaries. In order to be able to provide fast and further MFA of an exceptionally large size to a single beneficiary under the present circumstances, while maintaining its funding model, the Union needs to reinforce the Common Provisioning Fund by additional guarantees by the Member States that would act as a back-stop to the exposure to Ukraine.
In line with the requirements of the Financial Regulation, the Commission services will carry out during the implementation of the assistance an Operational Assessment (OA) of the financial and administrative circuits of Ukraine in order to ascertain that the procedures in place for the management of programme assistance, including MFA, provide adequate guarantees, also taking account the exceptional circumstances of the Russian war of aggression against Ukraine. This will allow to update previous assessment, which concluded that the financial circuits and procedures in Ukraine are found to be based and work on sound principles and are therefore deemed appropriate for the purposes of MFA.
• Impact assessment
The Union’s MFA is an exceptional emergency instrument aimed at addressing severe balance-of-payment difficulties in third countries. More generally, the Commission's MFA proposals build on lessons learned from ex-post evaluations carried out on past operations in the EU's neighbourhood. This exceptional MFA will help alleviate the short-term financing needs of Ukraine in the current extraordinary circumstances. The reporting requirements and policy conditions linked to this exceptional MFA aim to ensure the efficiency, transparency, and accountability of the support. This exceptional MFA should build upon the achievements of the six MFA programmes since 2015, including the latest COVID-19 and the early 2022 emergency MFA assistance.
The proposal does not require an Impact Assessment, as macro-financial assistance is the only available policy option to address the issue at hand. The use of additional guarantees follows a thorough financial risk assessment of outstanding liabilities.
• Regulatory fitness and simplification
The proposal is not linked to regulatory fitness and simplification.
• Fundamental rights
Countries that are covered by the European Neighbourhood Policy (ENP) are eligible for MFA. A pre-condition for granting MFA is that the eligible country respects effective democratic mechanisms, including a multi-party parliamentary system and the rule of law, and guarantees respect for human rights.
The renewed reform-commitment and strong political will by the Ukrainian authorities, in particular as evidenced by the successful completion of the structural policy conditionality attached to the emergency COVID-19 MFA programme to Ukraine, in key areas including the judiciary, good governance, the rule of law and the fight against corruption, is a clear positive sign. Similarly, the efforts deployed to underpin their application for an EU membership, notably through providing elaborated answer to two very comprehensive and detailed questionnaires, send a clear sign of the authorities’ willingness to follow, and deliver upon, the European aspirations of Ukraine. Since the Russian aggresion, the Ukrainian authorities have shown an impressive degree of resilience and have remained committed to pursue these reforms in a transparent manner and in line with EU standards. To that end, the political pre-condition for an MFA operation is considered to be satisfied at present.
4. BUDGETARY IMPLICATIONS
The funds for this EUR 5 billion exceptional MFA to Ukraine will be borrowed in the capital markets and on-lent to Ukraine. This will complement the EUR 1 billion exceptional MFA to Ukraine granted under Decision (EU) 2022/1201.
To protect the Union budget, the two exceptional MFA loans of an overall amount of up to EUR 6 billion to Ukraine should benefit from a 70% coverage composed by paid-in provisioning of 9% and callable guarantees from Member States of 61%. The required paid-in provisioning (at a rate of 9% of the External Action Guarantee) will be earmarked under the NDICI-GE, for a total amount of EUR 540 million (budget line 14 02 01 70 “NDICI-GE – Provisioning of the Common Provisioning Fund”). The scope for mobilising budgetary resources for this additional provisioning above the 9% under the current MFF ceilings is however limited. Recourse to guarantees by the Member States is needed in order to be able to provide further MFA loans to Ukraine in a sound budgetary manner and without disrupting the implementation of MFF 2021-2027. This is the rationale for the proposal that Member States provide guarantees for a further 61% of the value of the proposed EUR 6 billion in loans.
The overall coverage would thus benefit from a first loss protection with paid-in provisioning of 9% of the EUR 6 billion, followed by complementary guarantees by Member States covering exposures up to EUR 3.66 billion, or 61% of the EUR 6 billion of MFA loans and in line with the applicable legislation, any residual amounts would be covered by the Union budget as a contingent liability.
The exceptional macro-financial assistance to Ukraine under this Decision will be arranged directly upon entry into force of this Decision, and without waiting for receipt of the required national guarantees.
Given the urgent need to arrange loans for Ukraine in the course of 2022, the EU will arrange the loans before Member States’ guarantees are in place. Past experience has shown that while many Member States can provide guarantees within 2-3 months, it can take 4-5 months to receive the full set of guarantees. Delays of this duration cannot be countenanced given the extreme urgency of the Ukrainian financing needs. The Commission therefore envisages – on an exceptional basis given the extreme nature of the situation – to arrange the loans while receiving the guarantees in parallel.
During this interim period, investors in EU bonds incur no risk of non-payment by the EU during the short period before all guarantees are received because of the way that the present loan package has been constructed. In particular, no payments events will fall due during the interim period (4-5 months) before all guarantees are expected to be received. In the theoretical scenario that a non-payment were to occur in the period before all guarantees are received, the European Commission could draw on the provisions set aside for the MFA loans and, if needed, other provisions held in the EU’s Common Provisioning Fund.
Member States should complete their national procedures for the guarantees to enter into force as a matter of the utmost urgency.
The guarantees would cover amounts going beyond the initial paid-in provisioning of 9% of the loan amount under this Decision and Decision (EU) 2022/1201, which would be provided from the MFF as foreseen in Article 31(5) of the NDICI-GE Regulation and the financial programming. The calls will be confined to situations of non-payment by Ukraine on the loan under the current Decision and under Decision (EU) 2022/1201 and would be used to satisfy Union’s obligations in the first place and, as appropriate, to replenish the dedicated Ukraine related compartment in the Common Provisioning Fund. Such contributions would be taken into account for calculating the provisioning resulting from the provisioning rate referred to in Article 211 i of the Financial Regulation, by derogation from second subparagraph of Article 211 i of the Financial Regulation.
The amounts called from the Member States would constitute external assigned revenue within the meaning of Article 21(2)(a)(ii) of the Financial Regulation to provide contributions by Member States for provisioning for MFA, which is an external aid programme guaranteed under the NDICI-GE.
Given the exceptional nature of the macro-financial assistance backed by the guarantees it is appropriate to cover the financial liability from the MFA under this Decision and under Decision (EU) 2022/1201 separately from other financial liabilities under the External Action Guarantee. In particular, it is appropriate to use the provisioning set aside in the CPF in respect of this MFA solely for financial liabilities under this Decision, instead of the general rule of Article 31(6) of the NDICI-GE regulation.
The same risk considerations apply to ELM loans disbursed or to be disbursed by the EIB after 15 July 2022. This proposal therefore envisages extending the 70% provisioning rate to those loans, application of the rules on provisioning of the Financial Regulation, and not GFEA rules and provides that the provisions should be kept in a separate compartment of the CPF.
In addition, an interest rate subsidy should be provided as described below, to be borne by the envelope referred to in the first indent of point (a) of Article 6 i of the NDICI-GE during the period of the MFF 2021-27. The administrative costs related to the borrowing and lending would be waived and thus not recovered from Ukraine. They will be borne under the respective administrative budget lines.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The European Union shall make this exceptional MFA available to Ukraine for a total amount of EUR 5 billion in the form of long-term loans. This assistance, which is planned to be disbursed in several instalments, will contribute to covering the residual external financing gap of Ukraine in 2022. The first instalment will be paid after the approval of this proposal and the entry into force of the corresponding MoU, and as soon as Member States unanimously signal their agreement to complete their national procedures for submission of national guarantees as a matter of the utmost urgency.
The disbursement would further be conditional on the implemention of the reporting requirements as agreed in the MoU. The Commission will work closely with the international financial institutions and the national authorities to monitor relevant developments and the application of the requirements and conditions as agreed in the MoU.
The assistance will be managed by the Commission. Specific provisions on the prevention of fraud and other irregularities, consistent with the Financial Regulation, are applicable.
• Explanatory documents (for directives)
• Detailed explanation of the specific provisions of the proposal
The decision will also provide for a framework for guarantees by Member States to cover losses going beyond the provisioning already paid into the CPF or foreseen in the financial programming of MFF 2021-27.
Article 1 presents the main features of this exceptional macro-financial assistance.
Article 2 provides for compliance with the political preconditions necessary for the disbursement of macro-financial assistance.
Article 3 provides for clearly defined reporting and monitoring requirements, as well as policy conditions to which this Union's exceptional macro-financial assistance is to be linked. These requirements and conditions shall be set out in a Memorandum of Understanding.
Article 4 provides for the conditions necessary for the disbursement of this exceptional macro-financial assistance in multiple instalments. The timeframe and conditions for the disbursement of each instalment shall be laid down in the Memorandum of Understanding.
Article 5 presents the rules for the borrowing and lending operations.
Article 6 explains the financing of the interest rate subsidy.
Article 7 presents the reporting obligations of the Commission before the European Parliament and the Council, during the implementation of this exceptional macro-financial assistance to Ukraine.
Article 8 provides details on the assessment of implementation of the exceptional macro-financial assistance.
Article 9 provides for the establishment of national guarantees for an overall amount of EUR 3.66 billion by the Member States.
Article 10 provides details on the guarantee agreements that the Commission shall conclude with the Member States.
Article 11 describes the provisioning with respect to the covered MFAs.
Article 12 provides for reinforcing the provisioning with respect to some financial liabilities in Ukraine guaranteed under Decision No 466/2014/EU.
Article 13 provides for an assessment of the adequacy of provisioning and for a review procedure.
Article 14 provides accounting details on the provisioning held in the Common Provisioning Fund.
Article 15 stipulates that a Committee shall assist the Commission, in accordance with Comitology procedures.
Article 16 details the exercise of delegation.
Article 17 presents the reporting obligations of the Commission before the European Parliament and the Council during the implementation of this exceptional macro-financial assistance to Ukraine.
Article 18 contains the amendments to Decision (EU) 2022/1201.
Article 19 clarifies the date of entry into force of this Decision.