[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 16.11.2006

SEC(2006) 1460

COMMISSION STAFF WORKING DOCUMENT

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Comprehensive Report on the functioning of the Guarantee Fund {COM(2006) 695 final}

TABLE OF CONTENTS

Graph 1: Guaranteed Amounts covered by the Fund (end of year) 4

Graph 2: Cover of defaults by Fund Resources and recoveries (in EUR million) 5

Table 1: Flows in and out of the Fund since 1994 6

Table 2: Use of Reserve during Financial Perspectives 2000 – 2006 (in EUR) 7

Table 3: Ratio between total annual capital outstanding and interest due and theamount of the Fund 8

Table 4: Lending capacity with the present mechanism taking into account the budget constraint of EUR 1.4 billion* in the new Financial Framework 9

Table 5: Simulation of the new provisioning mechanism assuming the adoption of the Commission proposal on the new EIB external lending mandate 10

Attachment 1: IPSAS 11

Attachment 2: Explanatory Memorandum of Commission's proposal COM(2005)130 of 5.4.2005 12

1. Introduction / motivation 12

2. The Fund 12

3. The new provisioning mechanism 13

3.1. Basic principles of the new provisioning mechanism 13

3.2. Mitigating the impact of major losses caused by loan defaults on theneed to increase payments into the Fund - a smoothing mechanism 14

3.3. Financial implications of the new provisioning mechanism and the financial statement 15

4. Transition period 16

5. Conclusion 16

Attachment 3: Additional information on the Commission proposal for a newprovisioning mechanism for the Guarantee Fund for external actions 17

1. Brief summary of the advantages of the proposed new provisioning mechanism 17

2. Measures to improve the budgetary discipline 17

3. Budgetary implications of the new mandate and implications of a refusal of the Commission proposal for the new EIB mandate 18

4. Incompatibility of the present provisioning mechanism and the financingof the Fund through a budget line 20

5. Estimates of budgetary needs assuming the new provisioning mechanism is: 21

5.1. Table 1: New provisioning mechanism 21

6. Simulation of the past 23

Graph 1: Guaranteed Amounts covered by the Fund (end of year)

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Graph 2: Cover of defaults by Fund Resources and recoveries (in EUR million)

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Table 1: Flows in and out of the Fund since 1994

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Table 2: Use of Reserve during Financial Perspectives 2000 – 2006 (in EUR)[1]

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Table 3: Ratio between total annual capital outstanding and interest due and the amount of the Fund[2]

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Table 4: Lending capacity with the present mechanism taking into account the budget constraint of EUR 1.4 billion* in the new Financial Framework

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Table 5: Simulation of the new provisioning mechanism assuming the adoption of the Commission proposal on the new EIB external lending mandate [pic]

Attachment 1: IPSAS

Impact of IPSAS implementation on the valuation of Fund's assets

a) The European Communities undertake a major change to their accounting framework with the objective to produce their financial statements based on accrual accounts in 2005. In the framework of this modernisation, the Commission decided to present its accounts according to new accounting rules inspired by IPSAS principles.

b) The major change concerning the Fund is in the valuation of the Fund's portfolio which was valued before 2005 at historical cost (acquisition cost). Now the portfolio is valued at its market value and an adjustment of its value at the end of each year is required in order to reflect the market price of securities (mainly bonds) held by the Fund. Consequently the value of fund's assets is more volatile and its valuation is closely linked to the interest rate fluctuation.

The first application of IPSAS rules on the fund's assets, for 31/12/2005, resulted in a valuation change of the portfolio of EUR 47 million.

c) The duration of the portfolio varies around 3 years. This means that, assuming a 1% increase or decrease in the market interest rates, the Fund would lose or gain 3% of its value respectively. This example shows that due to the "mark to market" valuation of the Fund's assets, a certain increase in volatility will have to be expected in the future.

Attachment 2: Explanatory Memorandum of Commission's proposal COM(2005)130 of 5.4.2005

1. INTRODUCTION / MOTIVATION

The purpose of this amendment to Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions[3] (the “Regulation”) is to improve the rules of the provisioning mechanism of the Guarantee Fund (the “Fund”), i.e. the rules that determine how the Fund’s assets are brought in line with the target amount of the Fund.

Experience has shown that the present rules have often led to an over-provisioning of the Fund and therefore a sub-optimal use of budgetary funds. This problem has mainly been due to the use of uncertain forecast figures in the provisioning process. Furthermore, the present rules result in several transfers in and out of the Fund during one year, a situation that creates unnecessary administrative procedures involving not only the Commission services but also the two arms of the budgetary authority.

The proposed amendment is in line with the needs identified in the Comprehensive Report on the functioning of the Guarantee Fund (COM (2003) 604).

This amendment is limited to changes of the Fund’s provisioning mechanism.

2. THE FUND

The Regulation established a Fund for external actions so that the Community’s creditors could be reimbursed in the event of any default by the beneficiaries of loans granted or guaranteed by the Community. The main function of the Fund is to shield the Union budget from shocks due to defaults on loans or guaranteed loans covered by the Fund. The Fund is provisioned from the Union budget and has to be maintained at a certain percentage, the target rate (currently 9%), of the outstanding amount of the loans and loans guaranteed covered by the Fund.

The present provisioning mechanism is based on an ex-ante provisioning of individual Council decisions (Macro-financial assistance), individual forecasts of Commission decisions (Euratom loans) or a global annual forecast of planned loan signatures (EIB guaranteed lending).

3. THE NEW PROVISIONING MECHANISM

3.1. Basic principles of the new provisioning mechanism

The proposed new mechanism is based on an ex-post provisioning linked to the outstanding amount of loans and guaranteed loans, i.e. on actual net disbursements (i.e. disbursements minus amortizations minus cancellations).

In this context, one of the main advantages of the new provisioning system is its simplicity and its certainty about the budgetary requirements. Under the new mechanism, all figures necessary to determine the transfer from the budget to the Fund (or from the Fund to the budget) are known with certainty when the Preliminary Draft Budget (PDB) process starts and there is no need for forecasts (and the unavoidable forecast errors) and ex post budgetary adjustments.

In order to avoid the present practice of several transfers into the Fund during a year and a single payment from the Fund to the budget, only one net transfer between the Union budget and the Fund per year will occur under the new provisioning mechanism.

This simplification compares favourably with the present system which leads to numerous comparably high flows in and out of the Fund. For example, during the period 2000 – 2004, about EUR 894 million have been paid into the Fund in 13 transfers (the highest single amount being EUR 169 million) and about EUR 1,132 million have been paid back to budget in 5 annual payments resulting in a net transfer from the Fund to the Union budget of about EUR 238 million over this period. Compared to this total of 18 payments, the new system would have resulted in only 5 annual payments. According to simulations of the new mechanism assuming it had started in 1999, the highest annual single payment from the Union budget to the Fund would have been about EUR 88 million.

The single annual transfer is calculated as follows:

1. application of the target rate, currently 9%, to the amount of loans and guaranteed loans outstanding,

2. determination of the actual value of the Fund’s assets, including interest earned and losses caused by calls on the Fund,

3. transfer of the difference a) minus b) from the budget into the Fund (or to the budget in case of a resulting surplus in the Fund).

In a chronological view, the provisioning would take place in the following way:

Based on year-end outstanding amounts of loans and loans guaranteed in year “n-1” the required provisioning amount is calculated at the beginning of the year “n”. This amount is asked for in the PDB and a respective credit on the corresponding budget line is obtained at the beginning of the year “n+1”. Respectively, in case of a surplus of the Fund’s assets over the Fund’s target amount, an income to the budget will be entered in the PDB for the year “n+1”.

This implies a time lag between the moment when the year-end outstanding amount is known and the actual provisioning of about one year (January of year “n” to January/February of year “n+1”). This time lag is justified by the certainty of data and the improved transparency and predictability of the budgetary impact of the provisioning mechanism. This is not to be seen as an under-funding of the Fund. In fact, once inscribed in the draft budget for the following year, the amounts due can be considered as a sort of deferred payment by the Union budget similar to “capital not yet paid in” in the case of companies.

3.2. Mitigating the impact of major losses caused by loan defaults on the need to increase payments into the Fund - a smoothing mechanism

In case of major defaults a smoothing mechanism is foreseen, in order to maintain the Fund’s main purpose, i.e. to act as a shock absorber for the Union budget.

Losses caused by defaults on loans and guaranteed loans in year “n-1” would, without a specific rule, translate directly into an increase in the transfer to the Fund in the year “n+1”. The role of the Fund to act as a cushion to protect the budget from unexpected expenditure shocks could be compromised.

This problem is dealt within the proposal by the introduction of a smoothing mechanism to “spread” the impact of important losses due to defaults over several years. As smaller losses can be absorbed by the budget without problems, the smoothing mechanism would only be triggered if the losses would exceed a certain amount.

A threshold amount of EUR 100 million is proposed, based on the following reasoning:

According to estimates, based on various scenarios including a possible increase of the growth rate of loans and guaranteed loans during the next Financial Perspectives, the annual amount required for the “normal” provisioning would rarely exceed €100 million per year. If an amount of EUR 100 million to cover default–induced losses to the Fund (the maximum amount of losses that are absorbed by the “normal” provisioning mechanism without triggering the smoothing mechanism) or peaks in lending activity is added to this provisioning, the maximum annual budget transfer to the Fund would, under reasonable assumptions, be limited to an order of magnitude similar to the 2005 amount of the budget Reserve for the Fund (EUR 223 million).

An additional argument in favour of a smoothing mechanism setting in if losses exceed EUR 100 million is that the highest annual risk[4] for a given country is at present less than EUR 250 million, i.e. an amount which, in addition to the normal provisioning, would put too much strain on the budget for a given year. Obviously, it cannot be excluded either that more than one default could materialise during one year, or that the amounts would accumulate over time when a default situation persists for several years, which further supports the creation of a smoothing mechanism.

It should be noted that the smoothing mechanism works independently from the “normal” provisioning which would continue in its regular way. Over the smoothing period, each year the budget resources used for the smoothing transferred to the Fund portfolio (i.e. a maximum of EUR 100 million p.a.) would be deducted from the total amount to be recovered from the budget when the amount is effectively transferred to the Fund (together with the “normal” provision transfer) until the full amount is paid into the Fund. This solution has the advantage of being fully transparent by indicating which amount of the total annual provisioning of the Fund is due to the normal provisioning and which amount is due to the amortisation of the amounts to be recovered from the budget under the smoothing mechanism. The length of the smoothing period would depend on the amount of the overall default induced loss or series of losses to be recovered from the budget. For example the repayment of a loss of EUR 350 million that occurred in 2010 would be spread over a period ending in the year 2015 (EUR 100 million in 2012-2014 and EUR 50 million in 2015). The amounts to be recovered from the budget under the smoothing mechanism would be treated like an asset of the Fund, i.e. be included in the Fund’s assets when the “normal” provisioning is calculated.

In order to avoid that the Fund, in the extremely unlikely case of a series of severe losses, would fall below a critical level of 50 % of the target rate, where there would be insufficient funds to ensure the role of the Fund as shock absorber for the budget, it is foreseen to maintain the provision (current Art. 5(2) would become Art. 5(3)) according to which the Commission would submit a report to the budgetary authority on exceptional measures to replenish the Fund.

3.3. Financial implications of the new provisioning mechanism and the financial statement

In the financial statement, an amount equal to the “normal” provisioning (= provisioning to cover the amount of outstanding loans and guaranteed loans plus up to EUR 100 million for losses) of up to about EUR 200 million has been indicated. This amount is the result of simulations that are based on the past observed growth rates of the amounts outstanding and the occurrence of default-induced losses of up to EUR 100 million p.a.

As explained in the previous section, in the very unlikely case that the smoothing mechanism would be triggered in case of major default-induced losses to the Fund, these “smoothing” amounts would be added to the amount to be paid by the budget under the “normal” provisioning. However, the design of the provisioning mechanism ensures that in any given year the default-induced amounts to be paid by the budget will never exceed EUR 100 million p.a. in addition to the “normal” provisioning and, therefore, the amount of EUR 200 million will not be exceeded under normal circumstances.

It should, however, be noted that important changes in the growth rate of the amounts of loans and loans guaranteed would have an impact on the budgetary resources needed for the Guarantee Fund. An example for such a situation could be a strong increase in the guaranteed lending activities of the European Investment Bank in the context of the new mandate for the next Financial Framework 2007-2013.

If a surplus of the Fund’s assets over the target amount materialises at the end of a given year “n-1”, e.g. due to high amortisations, high returns on the Fund’s portfolio or the recovery of outstanding defaults, this amount would be paid to a special budget line at the beginning of the year “n+1” as a revenue in the same way as a provisioning. The Member States would in this case not be penalised compared to the present provisioning mechanism as the surplus amount would be entered in year “n” in the PDB for the year “n+1” as a revenue.

4. TRANSITION PERIOD

During the first year of its application, i.e. as of 1 January 2006, the new provisioning mechanism implies that no budgetary transfers will occur (change from an ex-ante to an ex-post approach). However, as it is possible that new loan decisions occur towards the very end of 2005, payments between the budget and the Fund that could, due to administrative delays, under such conditions only be made in the first year of the application of the new provisioning mechanism should still be carried out as foreseen under the current Regulation.

It should also be noted that the amendment can for obvious budgetary reasons only take place at the beginning of a year. Should the 1 January 2006 starting date not be feasible, the amendment should take effect at the first January of the year following its adoption by the Council.

5. CONCLUSION

The main improvements for the Fund’s provisioning mechanism are:

- The improvement of the efficiency of the use of budgetary means and reducing to one the number of annual transfers between the Union Budget and the Fund;

- A provisioning based on the variations of the observed net-disbursements, thus creating more transparency and improving the precision of the budgetary programming.

A ttachment 3: Additional information on the Commission proposal for a new provisioning mechanism for the Guarantee Fund for external actions

1. BRIEF SUMMARY OF THE ADVANTAGES OF THE PROPOSED NEW PROVISIONING MECHANISM

It should be recalled that the basic difference between the old and the new provisioning mechanism is the change from a signature based ex-ante system to an ex-post system based on amounts outstanding. The positive elements of the new mechanism are:

- closer link between outstanding amount and the 9% target amount as new system incorporates actual loan disbursement (instead of planned loan signatures),

- increased budgetary efficiency by greatly reducing the flows in and out of the Fund and reducing the number of payments to or from the Fund to only one payment per annum,

- increased transparency (notably the clear indication of the budgetary impact of losses to the Fund caused by calls on the guarantee),

- compatibility with the new Financial Framework which will change the source of financing of the Fund from the present Reserve to a funding via a budget line under heading 4 of the budget, and

- no requests on additional own resources to Member States during the year, as credits are budgeted following the normal annual budget procedure (i.e. amount determined and budgeted with certainty).

It should be stressed that the basic principles of the Guarantee Fund are not affected, i.e. its function to provide a cushion for shocks which otherwise would affect the budget directly and keeping the Fund at its target level of 9% of the amounts guaranteed which will be unaffected by the proposed change. Nor does the proposed change in the provisioning mechanism have any effect on the political decision-making processes with respect to loans or guarantee operations supported by the liquidity of the Fund (Council Decisions on EIB external lending mandates and on individual MFA and Euratom loans).

2. MEASURES TO IMPROVE THE BUDGETARY DISCIPLINE

The disappearance of the budgetary Reserve for the provisioning of the Fund could be seen to have somewhat weakened the budgetary discipline imposed by the Reserve which limited the maximum annual amount of new guaranteed lending. It should be understood that the agreement on the new financial framework - which implies a change in the source of financing of the Fund from the present Reserve under the ad-hoc Heading 6 to a funding via a budget line under heading 4 of the budget – is an essential change in this aspect.

However, in the absence of the Reserve, the substantial elements of budgetary discipline are still in place: the EIB's external lending mandate will be limited over the 2007 to 2013 period (this Council Decision represents around 90% of the overall loan volume), Macro-Financial Assistance loans are subject to individual decisions by the Council and the Euratom lending has a ceiling of EUR 4 bn (which has already been used to a large extent).

With a view to further strengthening the budgetary discipline as much as possible, the Commission will propose that the EIB will report annually on the actual implementation of the new mandate and also indicates the likely amount of planned annual new loan signatures over the following years in line with its Corporate Operational Plan as updated and approved every year by its Board of Directors. This will lead to a greater transparency of the annual needs of budgetary resources.

In addition, the Commission will provide forward looking information on the annual budgetary impact of individual MFA proposals, in particular the expected disbursement schedule in the corresponding financial statements, thus providing as much budgetary transparency as possible when a Macro-Financial Assistance loan is decided.

Finally, since the necessary appropriations to maintain the Fund at its target amount are determined and budgeted in the PDB (therefore in May of year n-1), full justification on the situation of the Guarantee Fund and on the required amount will be provided and debated during the annual budget procedure.

3. BUDGETARY IMPLICATIONS OF THE NEW MANDATE AND IMPLICATIONS OF A REFUSAL OF THE COMMISSION PROPOSAL FOR THE NEW EIB MANDATE

In the annex, detailed tables are presented on the budgetary impact of the planned new EIB mandate and Euratom and Macro-Financial Assistance loans under two different scenarios:

- the new provisioning mechanism

- the current mechanism

The following table summarises the results:

|2007 |2008 |2009 |2010 |2011 |2012 |2013 |2014 |2015 |Total | | scenario1 : budgetary needs new mechanism | 0 |-157 |-2 |129 |153 |160 |165 |160 |162 |770 | | scenario2 : budgetary needs current mechanism |244 |285 |307 |332 |359 |388 |421 |for info: 421 |for info:421 |Sub-total 2007-2013 = 2,336 | |See footnote[5] for explanation on the assumptions underlying these estimates

The results clearly indicate that the (gross) amounts of budgetary resources needed under the new provisioning mechanism will be substantially lower as compared to the present provisioning mechanism (see also annex 3 for a simulation of the past). In this context, it should also be noted that the Commission proposal on the new EIB external lending mandate adopted by the Commission on 22 June has been elaborated under the assumption that the new provisioning mechanism will be in place.

It should also be noted that the annual amount of EUR 200 million p.a. foreseen under the Financial Perspectives is substantially less than the present Reserve of EUR 200 million p.a. in 1999 prices (i.e. € 229 million in the 2006 budget).

As can be seen from the estimates, about half of the EUR 1.4 billion will be used to finance the increase in the amounts covered by the Fund (EIB, MFA and Euratom). The other half can be considered as a reserve to cover calls or interest-rate induced value changes of the Fund's assets.

The table also shows that the envisaged volume of EUR 33 billion for the new EIB external lending mandate could not be financed with the old mechanism. It would require about EUR 2.3 billion – versus 1.4 billion foreseen in the new Heading 4 - during the 2007-2013 period for the provisioning of the Fund, i.e. an amount not compatible with the new Financial Framework for the financing of the Fund.

Inversely, assuming the old provisioning mechanism were still in place and under the assumption that Euratom and Macro-Financial assistance loans would have the same volume, the EIB mandate could under this condition be only about EUR 17 billion for the 2007-2013 period (about EUR 21 billion including Euratom and Macro-Financial Assistance loans).

4. INCOMPATIBILITY OF THE PRESENT PROVISIONING MECHANISM AND THE FINANCING OF THE FUND THROUGH A BUDGET LINE

The current system cannot work properly with the new IIA which does not foresee a reserve for financing the budgetary needs of the Guarantee Fund.

Should the present mechanism be maintained, important problems would arise for the handling of the provisioning from a budgetary and technical point of view. The financing of the Fund via a budget line implies that in year n (n+1 indicating the year when the provisioning takes place) the amounts to be provisioned have to be inscribed in the budgetary planning. As these amounts are not known with certainty – EIB signatures in the year n can only be estimated with a degree of uncertainty and Macro-Financial Assistance loans are also not easily to be foreseen – it will be the rule rather than the exception that the amounts inscribed in the budgetary planning are not correct but either too high or too low. If they are too low, additional budgetary resources would have to be found within heading 4 during the year n or a supplementary budget would have to be introduced. If the amounts inscribed turn out to be too high, the funds not used will be either cancelled or, more likely, will be used for other activities under heading 4. In either case, the budgetary planning and transparency would be compromised.

In addition, it would be very difficult or even impossible to provision the Fund in accordance with the Fund regulation should an unforeseen and therefore not budgeted decision on Macro-Financial Assistance loans be taken towards the end of a year. In this case a lack of credits on the budget line for the Fund would make it very difficult or impossible to find the necessary means to provide the necessary appropriations to the Fund's budget line.

5. ESTIMATES OF BUDGETARY NEEDS ASSUMING THE NEW PROVISIONING MECHANISM IS:

5.1. Table 1: New provisioning mechanism

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5.2. Table 2: Current provisioning mechanism

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6. SIMULATION OF THE PAST

In order to evaluate the effects of the newly proposed provisioning mechanism, a simulation has been carried out using past data for the period 1999-2004. The result of this simulation clearly indicates that the use of budgetary resources would have been lower than was the case with the present mechanism. In addition, the number of transfers between the budget and the Guarantee Fund (GF) would have been reduced to one transfer per annum.

However, it should be noted that the result of the simulation has to be interpreted with care as it was necessary to make certain assumptions which influence the result :

- The new provisioning mechanism is based on the change in the amounts of loans and loan guarantees outstanding (i.e. the difference between new disbursements plus accrued interest earned minus amortizations). This implies that for the purpose of the simulation disbursements and amortizations had to be included in the calculation. These disbursements and amortizations have been modelled in an approximate way given the data constraints concerning the real amortization flows and the uncertainty of disbursements.

- It should be noted that the proposed new approach diverges substantially from the present approach which is based on loans signed/decided, i.e. not yet disbursed. In addition, the present mechanism is based for its most important part, i.e. the provisioning of EIB guaranteed external lending, on forecasts of loan signatures. The ex-ante provisioning under the present mechanism and the ex-post approach under the new proposal imply that comparisons between the two are not be meaningful on a year-to-year basis but only by comparing overall results over a prolonged period.

- The data used for the simulation are those of the historic development of the GF, i.e. amounts outstanding, interest rate realized, calls/recoveries[6] that occurred. It should also be noted that in the new mechanism, the interest earned on the GF's assets will have the same effect as provisioning; interest earned will therefore not be paid back to the budget as is de facto the case in the present mechanism.

Taking these considerations into account, the result of the simulation can be summarized as follows:

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Conclusion from the simulation of the past:

The simulation clearly indicates that the number of transfers would have decreased sharply from 21 to 6 over the 1999-2004 period. The use of budgetary funds would also have been reduced as the transfer from the GF to the Budget would have increased from a surplus of EUR 575 million under the present regime to EUR 824 million under the new regime if the payments linked to the same year are compared (example: the flows of the present mechanism for the year 2000 have to be compared with the flow early 2002 in the new mechanism). A comparison of the actual flows would be misleading as the proposed new mechanism works with a time-lag.

[1] The legal base for the Reserve is laid down in the Inter-institutional Agreement of 6 May 1999.The conditions for the entry, use and financing of the Reserve for guarantees are laid down in the following legal texts:

- Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 implementing Decision 94/728/EC, Euratom on the system of the Communities' own resources;

- Council Regulation (EC) No 2040/2000 of 26 September 2000 on budgetary discipline;

- Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities;

- Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions as last amended by Council Regulation (EC, Euratom) No 2273/2004 of 22 December 2004.

[2] It is assumed that the maximum amounts to be covered in case of defaults for a year is equal to the amounts due for this year with the interests due. The amounts reported in the period 2007-2013, are based on the assumption that the present provisioning mechanism is still in force and the reserve is limited to the EUR 200 million per year in "constant prices" for the growth of the Fund which results in a maximum of EUR 21.5 billion lending capacity to be covered (EUR 2.5 billion MFA, EUR 2 billion Euratom and EUR 17 billion EIB). It should be noted that the figures for 2006 until 2013 are projections. The historic figures had to be based on certain assumptions and therefore should be interpreted as approximations.

[3] OJ L 293, 12.11.1994, p. 1. Regulation as amended by Regulation (EC, Euratom) No 1149/1999 (OJ L 139, 2.6.1999, p. 1) and by Regulation (EC, Euratom) No 2273/2004 (OJ L 396, 31.12.2004, p. 28).

[4] As defaults do usually not lead to an acceleration of the whole credit amount, the annual risk can be defined as the amounts due in one year for amortisation and interest.

[5] Comment to the table: Due to the difference in ex-ante and ex-post provisioning the corresponding actual payments to or from the Fund will take place 2 years later under the new provisioning mechanism.A number of assumptions had to be made in order to calculate these scenarios.The main assumptions, common to both scenarios are:-Euratom and Macro-Financial assistance EUR 4.5 billion over the 2007-2013 period, signatures equally distributed;-EIB external mandate EUR 33 billion over the 2007-2013 period;-Annual increase in EIB signatures 10%;-Annual interest rate earned on assets 3,5%;-Accession of Romania and Bulgaria takes place on 1 January 2007;The figures beyond 2013 are purely indicative as no basis exist to estimate the amounts of signatures in these years. In the present estimates, it has been assumed signatures remain at the high level reached in 2013.Specific assumptions for the new mechanism:Only the budgetary needs caused by the increase in the guaranteed amount are shown. In reality, calls on the Fund (due to the smoothing mechanism they are limited to EUR 100 million) and variations in the market value of the Funds assets (a 1% interest rate increase would cause the value of the assets to fall by about 3 %) could cause additional needs in the order of up to EUR 130 to 160 million p.a.Specific assumptions for the actual mechanism:In addition and for comparability reasons, for the simulation of the actual provisioning mechanism, it has been assumed that the EIB can predict its annual signatures correctly. Experience has shown that in most years the figures have been overestimated and consequently lead to higher than necessary payments into the Guarantee Fund.No calls or mark to market value adjustments of the portfolio are assumed to occur.

[6] The term “Calls” refers to activation of a guarantee covered by the Fund. Calls lead to outflows of the Guarantee Fund’s assets. The term “Recoveries” refers to inflows into the Fund’s assets when amounts which have initially led to a call have be recovered at a later stage from a debtor. Since its creation in 1994, the total of calls on the Guarantee Fund totaled EUR 478 million, of which have all been recovered eventually.