Published on 17 January 2019

The Daily Express issued a “shock horror” story on 30th December that the EU was in financial meltdown over the loss of the UK’s budget contributions.

This seems overstated.

They have no need to worry for a little while if they get their €40 billion “divorce settlement” – which will be used to cover normal expenditure and not the items that it was held out as being the UK’s residual liabilities.

Whoever are the beneficiaries of those liabilities should be quite worried: will there be enough assets in the EU pot to meet those liabilities when they fall due?

In the meantime the Withdrawal Agreement enables the other Member States to add the UK’s guarantee to EU borrowings taken on to replace its Member State cash contributions. In other words the UK will guarantee what it does not contribute in cash.

The UK should be concerned that it will remain as a joint-and-several-liability guarantor of the funds and guarantees issued under the Commitments Appropriation of the EU Budget during this Multiannual Financial Framework (“MFF”), as well as the preceding ones.

This already includes two sizeable FUNDS: the European Financial Stabilisation Mechanism and the Balance of Payments Facility, totalling €110 billion with €61 billion of that currently undrawn and available to be drawn under circumstances which are opaque i.e. which give the EU authorities sufficient leeway to create a plausible reason so as to meet the needs of the moment.

There are also two sizeable GUARANTEES, both in favour of the European Investment Bank (“EIB”): for loans the EIB makes outside the EU, and for loans the EIB makes within the EU in the context of the European Fund for Strategic Investments (“EFSI”).

It is unclear whether the UK ceases to be a guarantor for the drawings under these funds/guarantees made up until March 2019, or up until the end of the current MFF in December 2020 – which is the mooted end of the transition period. The “convenience” of the transition end date eliding with the expiry date of the current MFF underpins the belief that the UK will be on the hook as guarantor for all the EU’s obligations under its Commitments Appropriation as at that date.

In that case the UK should be particularly careful of two things.

Firstly that any undrawn portions of existing funds/guarantees are cancelled as at December 2020 and do not get carried over into the next MFF for drawing then, such that the UK’s risk will continue to rise in 2021 and thereafter.

Secondly there is a very large portion of the Commitments Appropriation in the current MFF that has not been availed i.e. it has not been earmarked to a fund or a guarantee.

When we looked at this for Bruges Group before the Brexit Referendum we calculated (and this is no exact science due to the mass of EU data but lack of concise answers to the most obvious questions) that the EU could create new availments of the Commitments Appropriation right up until 31/12/20, with no need to pro-rate the usage, as happens with the Payments Appropriation (the cash budget). The cash budget is 0.97% of EU GNI per annum, and applies to each year individually with no carry-over of unspent amounts.

New funds/guarantees can be availed by Qualified Majority Voting in a Council of Ministers (all the Prime Ministers or all the Finance Ministers), and a similar procedure is needed to agree programmes to draw on existing funds (but not guarantees, which get drawn by the EIB deciding to make a loan outside the EU or to fund an EFSI project).

The current funds do have some headroom in them.

The €50 billion Balance of Payments Facility has approximately €48 billion available, as only three countries have ever used it: Hungary (€6.5 billion now repaid), Latvia (€3.1 billion of which 75% has been repaid), and Romania (€5 billion, being paid off in instalments concluding in 2019).

The European Financial Stabilisation Mechanism has a ceiling of €60 billion with €46.8 billion lent out to Ireland and Portugal with very long maturity dates, out to 2042. It is opaque what the circumstances are under which the undrawn €13.2 billion could be drawn, but it has not been cancelled.

The liability under guarantees to the EIB is opaque because of carry-overs from previous MFFs, but we calculated in 2016 that the amount-at-risk from previous MFFs was €36 billion, and then a ceiling had been set in the current MFF for loans outside the EU of €30 billion and for loans in the context of the EFSI of €16 billion.

As a result we have up to €146 billion created under previous MFFs (BoP Facility €50bn, EFSM €60bn, EIB loans €36bn), with about €61 billion of that undrawn and available to be drawn at any time, and not needing to be drawn before the end of 2020. None of this amount need be offset against the Commitments Appropriation in the current MFF.

Then we have €46 billion of guarantees created under the current MFF (€30bn to EIB for loans outside the EU, and €16bn to EIB for loans in the context of the EFSI)

But the ceiling for the creation of new funds/guarantees under the current MFF was €280 billion in 2016, or 0.29% of expected EU GNI over the period of the MFF.

This amount remains available for conversion into funds/guarantees, apart from the €46 billion already converted and subject to the final determination of what 0.29% of EU GNI was.

Thus the EU can create new funds/guarantees of up to around €234 billion before 31/12/20, and can make them drawable after that date if they choose.

Taken together with what was availed under previous MFFs, this adds up to a potential liability of €426 billion.

Unless the UK makes sure that it is no longer to be classed as a guarantor of such funds/guarantees, it will remain on the hook for a very big amount and for a long time.

We expect that the EU will first expand the Balance of Payments Facility, since expanding what already exists is easier than setting up something new. Countries using the BoP are meant to use it to assist their passage into the Euro, but Romania and Hungary were allowed to use it without being on an explicit pathway into the Euro. So the qualifications can be bent to suit the needs of the moment. “Balance of Payments difficulties” can be classed as difficulties with the entire external public budget, including shortfalls in Brussels handouts coming in and/or increases in EU member contributions going out. The qualifications for the use of the BoP Facility can be fitted around the circumstances of Brexit, such that Brussels can borrow the money and lend it out to any non-Eurozone member states.

The second recourse would be a vast increase in the EFSI and therefore in the EU guarantee to the EIB for this purpose, and the increased loan quotas could be tilted towards the Eurozone member states to counterbalance what they could not get out of the BoF Facility.

That could all be done quite quickly, leaving the rest of 2019 and 2020 to set up new funds/guarantees, with the EU already being authorised to borrow in its own name to finance any funds set up through this agreed process.

The UK should be very wary about all of this but we would be fairly confident in positing that the UK’s negotiators have not got their eye on this ball. Replacing the UK’s cash contributions of €10 billion per annum is not such a task given the funds/guarantees available under the current and previous MFFs. The shortfall could be met for the first 4 years via the Balance of Payments Facility and then, if the mechanism can be agreed before the date after which the UK can no longer be put on the hook (scheduled as 31/12/20), there is another €234 billion to hand within the scope of the current MFF, to last them through to 2050 and on the UK’s credit card.