EUROPEAN COMMISSION Brussels, 5.7.2016 COM(2016) 439 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL ON THE GUARANTEE FUND FOR EXTERNAL ACTION AND ITS MANAGEMENT IN 2015 {SWD(2016) 220 final}



Table of Contents 1.Introduction 2.Financial Position of the Fund at 31 December 2015 2.1.Financial flows of the Fund 2.2.Significant transactions 2.3.Significant transaction after the reporting date 2.4.Presentation of the accounts 2.4.1.Basis of preparation 2.4.2.Pre-consolidated financial statements for the Fund at 31 December 2015 3.Payments to or from the Fund 3.1.Legal basis for payments to the Fund from the general budget 3.2.Payments to or from the general budget in the course of the financial year 3.2.1.Provisioning of the Fund 3.2.2.Interest from the investment of the Fund’s liquid assets 3.2.3.Financial operations revenues 3.2.4.Revenues and expenses from operating activities 4.The Fund’s liabilities 4.1.Default payments 4.2.EIB remuneration

1.Introduction Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 (codified version) (‘the Regulation‘) established a Guarantee Fund for external actions (‘the Fund’) in order to repay the Union’s creditors in the event of default by beneficiaries of loans granted or guaranteed by the European Union. In accordance with Article 7 of the Regulation, the Commission entrusted the financial management of the Fund to the European Investment Bank (EIB) under an agreement between the Community and the EIB dated 25 November 1994, and subsequently amended on 23 September 1996, 8 May 2002, 25 February 2008 and 9 November 2010 (‘the Agreement’). Article 8 of the Regulation requires the Commission to send a report to the European Parliament, the Council and the Court of Auditors on the situation of the Fund and the management thereof for each financial year by 31 May of the following year. This report together with the Commission Staff Working Document (SWD) provides this information. It is based on data received from the EIB, in line with the agreement. 2.Financial Position of the Fund at 31 December 2015 The financial position of the Fund is the sum of all the financial flows since the setting up of the Fund in 1994. 2.1.Financial flows of the Fund The Fund totalled EUR 2,343,091,110.14 (see Annex of the SWD: Guarantee Fund financial statements as at 31 December 2015, as provided by the EIB). This is the sum of the flows since the Fund was established: Guarantee Fund Amount at 31.12.2015 Amount at 31.12.2014 Change 2014-2015 budget contributions to the Fund 4,000,358,104.00 3,743,236,312.00 257,121,792.00 successive yearly net results 940,394,573.31 908,051,618.54 32,342,954.77 recoveries of payments made by the Fund for defaults 578,854,353.78 578,854,353.78 - variation in other accounts payable 23,101,194.04 23,084,839.03 16,355.01 fees received on late recovery (in 2002) 5,090,662.91 5,090,662.91 - guarantee calls paid -705,104,452.97 -644,939,881.42 -60,164,571.55 successive repayments to the budget (including exceptional repayment to the budget due to the accession of new Member States) -2,531,726,712.72 -2,531,726,712.72 - adjustment of portfolio valuation according to IFRS valuation 32,123,387.79 56,101,855.45 -23,978,467.66 Accounting value of the Fund (Total assets) 2,343,091,110.14 2,137,753,047.57 205,338,062.57 The accounting value of the Fund increased by about EUR 205 million in 2015. This is explained by : Increasing The contribution from the budget (provisioning amount) of EUR 257 million to adjust the Fund to the 9% target amount The net revenues on financial operations amounted to EUR 32 million Decreasing Intervention of the Fund to cover defaulted payments by Syria for a total amount of EUR 60 million. The portfolio valuation decrease by EUR 24 million due to the mark to market adjustment of its value.

2.2.Significant transactions (1)Since November 2011, the EIB is facing arrears on Syrian sovereign loans. As a consequence, and in line with the guarantee agreement between the EU and the EIB, the EIB has made 29 calls on the EU Guarantee Fund up to 31 December 2015 for a total amount of EUR 225.1 million (see point 4.1 Default payments). (2)In February 2015, the contribution from the budget to the Fund was calculated following Article 3 and Article 5 of the Regulation: Article 3 of the Regulation sets a target amount for the Fund of 9 % of the total outstanding capital liabilities arising from each operation, plus any unpaid interest due. Article 5 of the Regulation states that the amount to be transferred from the budget to the Fund in year n + 1 is calculated on the basis of the difference between the target amount and the value of the Fund’s net assets at the end of year n - 1, calculated at the beginning of year n. To adjust the Fund to the 9% of the total outstanding capital liabilities, an amount of EUR 257.1 million was entered in the 2016 budget for the provisioning of the Fund. At 31.12.2014, the target amount was EUR 2,371.8 million corresponding to the 9% of the total outstanding guaranteed operations (EUR 26,353.2 million). The difference between the target amount and the net assets of the Fund of EUR 2,114.7 million at 31.12.2014 was equal to EUR 257.1 million. This amount was requested for the provisioning of the Fund in 2016 and was approved by the Council and the European Parliament as part of the approval of the 2016 budget in November 2015. It was subsequently recognised as a receivable of the Fund from the budget. (3)In February 2015 an amount of EUR 144.4 million was transfered from the budget to the Fund corresponding to the provisioning amount for 2015 (see details in paragraph 3.2.1 provisioning of the Fund). 2.3.Significant transaction after the reporting date In February 2016 an amount of EUR 257.1 million was transfered from the budget to the Fund corresponding to the provisioning for 2016. 2.4.Presentation of the accounts 2.4.1.Basis of preparation The Fund's financial statements (as well as the pre-consolidated financial statements) have been prepared in accordance with the accounting rules adopted by the Accounting Officer of the European Commission, in particular "Accounting rule 11 - Financial instruments" as explained in the SWD. 2.4.2.Pre-consolidated financial statements for the Fund at 31 December 2015 The pre-consolidated financial statements of the Fund are prepared in order to include accounting operations which are not included in the Fund's financial statements prepared by the EIB (see SWD), which implies a difference in the total assets value of the Fund in the financial statements prepared by the EIB (EUR 2,343,091,110.14) and the total assets value of the Fund in the pre-consolidated financial statements (EUR 2 107 985 583). The pre-consolidated financial statements include any arrears due plus the interest accrued on late payments (fully impaired as of 31.12.2015) and other accounting accruals until the full repayments of amounts due to the Fund. Thus, there will be a full set of financial statements for the Fund at the end of the year to be consolidated in the EU consolidated financial statements. The current assets in the pre-consolidated financial statements include a temporary receivable with the EIB of EUR 22,016,265 for guarantee calls not yet paid plus related amounts, where the EIB remains creditor of Syria until the payment of the call. The current liabilitites include a payable to the EIB of EUR 22,763,789 for guarantee calls not yet paid plus related amounts. Guarantee Fund: Pre-consolidated balance sheet The pre-consolidated balance sheet is the preparation of the balance sheet for its consolidation in the EU's consolidated financial statements. The main items are explained in the notes to the balance sheet.



Balance sheet – Assets 31 December 2015 31 December 2014 NON-CURRENT ASSETS 1,614,233,483 1,499,128,901 Financial assets 1,614,233,483 1,499,128,901 CURRENT ASSETS 493,752,100 517,361,813 Financial assets 387,792,573 346,281,423 Receivables 22,016,264 23,147,185 Cash and cash equivalents 83,943,262 147,933,205 TOTAL ASSETS 2,107,985,583 2,016,490,714

Balance sheet - Liabilities 31 December 2015 31 December 2014 CONTRIBUTOR'S RESOURCES 2,082,760,780 1,991,699,974 European Commission contribution 1,211,509,598 1,067,100,081 Fair value reserve 32,123,388 56,101,855 Retained earnings 839,127,794 868,498,038 NON-CURRENT LIABILITIES - - CURRENT LIABILITIES 25,224,803 24,790,740 Payables 25,224 803 24,790,740 TOTAL CONTRIBUTOR'S RESOURCES + LIABILITIES 2,107,985,583 2,016,490,714

Notes to the balance sheet: ‘Current receivables’ includes amounts of loans that have been called but not yet paid (payment in January - March 2016), plus related amounts. The difference in ‘Retained earnings’ in equity compared with the financial position of the Fund presented in the SWD is explained by the successive repayments of calls and penalties to the Fund. ‘Current payables’ include the calls to guarantees unpaid at the balance sheet date plus related amounts, the accrual of the recovery fees due to the EIB, EIB management commission and audit fees. Guarantee Fund: Pre-consolidated economic outturn account In the same way as the balance sheet, the pre-consolidated economic outturn account is prepared for inclusion in the consolidated financial statements of the EU. 2015 2014 Revenue from operating activities 477,789 263,355 Expenses from operating activities (1,591,683) (1,516,968) RESULT FROM OPERATING ACTIVITIES (1,113,894) (1,253,614) Financial income 40,109,123 35,209,330 Financial costs (68,365,473) (149,238,663) FINANCIAL RESULT (28,256,350) (114,029,333) ECONOMIC RESULT OF THE YEAR (29,370,244) (115,282,947) Notes to the economic outturn account: The ‘Financial costs’ consist in impairment losses on subrogated loans, related to defaulted payments (see section 4.1) 3.Payments to or from the Fund This section explains the financial flows going to or out of the Fund. 3.1.Legal basis for payments to the Fund from the general budget The Regulation ensures an efficient use of budgetary resources by provisioning the Fund on the basis of the observed amounts of guaranteed loans outstanding. As the amount of outstanding liabilities increases, the EU budget contribution required to maintain the target amount for the Fund will also increase. The target amount is 9 % of the Communities total outstanding capital liabilities arising from each operation, increased by unpaid interest due, including all types of operations covered (EIB, MFA and Euratom loans) outside the EU. The difference between the target amount and the value of the Fund’s net assets will result in provisioning from budget line 01.03.06 ‘Provisioning of the Guarantee Fund’ to the Fund or in payment from the Fund to the budget in the event of a surplus. 3.2.Payments to or from the general budget in the course of the financial year 3.2.1.Provisioning of the Fund

On the basis of the outstanding guaranteed operations of EUR 23,609.2 million as of 31.12.2013, an amount of EUR 144.4 million, was inserted in budget line 01.03.06 ‘Provisioning of the Guarantee Fund’ in the statement of expenditure in the general budget of the European Union for 2015. This amount was paid in one transaction from the budget to the Fund in February 2015. 3.2.2.Interest from the investment of the Fund’s liquid assets Investment policy The Fund’s liquid assets are invested in accordance with the management principles laid down in the Annex to the Agreement, as amended. Accordingly, 20 % of the Fund must be invested in short-term investments (up to one year). These investments include variable-rate securities, irrespective of their maturity dates, and fixed-rate securities with a maximum of one year remaining to maturity, irrespective of their initial maturity period. To maintain a balance between the various instruments providing the required liquidity, a minimum of EUR 100 million is kept in money market instruments, particularly bank deposits. Up to 80% of the Fund can be placed in a portfolio of bonds with a remaining maturity of no more than 10 years and 6 months from the date of payment. The average duration of the placements of all Fund assets may not exceed 5 years. The investments in bonds should respect some specific criteria such as liquidity, credit quality, eligibility of the counterparties and concentration limits. In order to ensure a good risk diversification, the total amount invested in the bonds per single issuer must not exceed 10% of the total nominal amount of the portfolio. Performance During the year 2015, the macro economic conditions and the very accommodative monetary policy environment has resulted in decreasing, and often negative, interest rates The Fund delivered an absolute return of +0.47% during 2015, overperforming its benchmark by 0.9 bps. The benchmark of the Fund is a composite mainly built from iBoxx indices (in particular EUR Eurozone Sovereign and EUR Collateralized Covered indices) and Euribid for the short-term exposure. .The positive performance of the Fund in 2015 was mainly explained by the decline of the short end of the yield curves (see section 1.4.2 ‘Performance’ of the SWD for more details that occurred durint the year). 3.2.3.Financial operations revenues In 2015, interest income on cash and cash equivalents, on securities and accrued income on subrogated loans totalled EUR 40 109 123, broken down as follows: Description: 2015 2014 Interest income on cash and cash equivalent 17,621 267,136 Interest on short-term deposits 6,496 263,229 Interest on current bank accounts 11,125 3,907 Interest income on AFS assets 24,226,548 29,274,967 Interest - Available For Sale portfolio 29,814,016 30,590,691 Premium discount (5,587,468) (1,315,724) Income from securities lending activities 115,810 99,651 Realized gain on sale of financial assets 9,176,574 1,162,567 Accrued interest on subrogated loans 6,572,571 4,405,009 Interest from financial investment of the Fund's liquid assets 40,109,123 35,209,330



3.2.4.Revenues and expenses from operating activities The result from operating activities amounted to EUR -1,113,894, which include the EIB management fees for EUR 861,228, other operating expenses (mainly custody fees) for EUR 190,955, the external audit fees for EUR 39,500, unrealised exchange gain on subrogated Loans for EUR 477,789 and accrued EIB recovery fees for EUR 500,000 (maximum agreed amount). 4.The Fund’s liabilities The Fund's liabilities correspond to all the financial commitments due by the Fund. 4.1.Default payments Calls on the Guarantee Fund following defaulted payments