EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 21.6.2005 
COM(2005) 262 final 
  
REPORT FROM THE COMMISSION 
Annual Report from the Commission 
on the Guarantee Fund and its Management in 2004 
  
{SEC(2005) 807} 
 
EN 2   EN TABLE OF CONTENTS 
1. Legal bases................................................................................................................. .. 3 
2. Position of the Fund at 31 December 2004.................................................................. 3 3. Payments into the Fund................................................................................................ 4 3.1. Payments from the general budget in the course of the financial year ........................ 4 3.2. Interest from financial investme nt of the Fund's liquid assets..................................... 5 
3.3. Recovery from defaulting debtors................................................................................ 6 4. The Fund's liabilities .................................................................................................... 6 4.1. Default payments ......................................................................................................... 6  
4.2. EIB remuneration......................................................................................................... 7  
4.3. Foreign exchange losses............................................................................................... 7 
 
EN 3   EN 1. L EGAL BASES  
Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 (“the 
Regulation”) set up a Guarantee Fund for ex ternal actions in order to repay the 
Community's creditors in the event of defa ult by beneficiaries of loans granted or 
guaranteed by the Community (OJ L 293, 12.11.1994, p. 1). The Regulation was 
amended by the Council Regulation (EC,  Euratom) No 1149/99 of 25 May 1999 (OJ 
L 139, 2.6.1999, p. 1) and the Council Regulation (EC, Euratom) No 2273/2004 of 22 December 2004 (OJ L 396, 31.12.2004, p. 28) (“the amended Regulation”)
. 
In accordance with Article 6 of the Regula tion, the Commission entrusted financial 
management of the Fund to the Eur opean Investment Bank (EIB) under an 
Agreement signed between the Community and the EIB on 23 November 1994 in Brussels and on 25 November 1994 in Luxembourg (“the Agreement”). 
 
Under Article 8.2 of the Agreement, by 1 Ma rch of each year the Bank must send the 
Commission a status repor t on the Fund and its management, the revenue and 
expenditure account and the financial statem ent for the Fund for the preceding year. 
An extract from the report covering the year 2004 can be found in section 2 of the 
Commission Staff Worki ng Paper (“the Annex”)1. 
In addition, Article 7 of the amended Re gulation requires the Commission to send 
the European Parliament, the Council and the Court of Audito rs a report on the 
situation of the Fund and its management fo r each financial year by 31 May of the 
following year. 
2. P OSITION OF THE FUND AT 31 D ECEMBER  2004 
At the close of the 2004 financial ye ar, the Fund totalled EUR 1,612,856,213.44 (see 
section 3 of the Annex). This is the su m, since the Fund was established, of all: 
– budget payments to the Fund (EUR 2,532,164,500.00); 
– successive yearly net results (EUR 473,032,495.02); 
– late repayments from non-me mber countries (EUR 575,673,913.77); 
– debts corresponding to the repayments not made to the EIB (EUR 765,497.93); 
– commission received on late recovery in 2002 (EUR 5,090,662.91); 
– less calls on the Fund's resour ces (EUR 477,860,856.19) and successive 
repayments to the budget of the surplus in the Fund (EUR 1,496,010,000.00). 
After the deduction of accruals (EIB's  remuneration), the Fund total at 
31 December 2004 amounts to EUR 1,612,090,715.51. 
                                                 
1 SEC(2005) 807 
 
EN 4   EN The total amount of the consolidat ed balance sheet is EUR 1,614,117,863.19. This 
includes the total amount of the Fund plus  the arrears covere d by the Fund and the 
accruals of interests on late payments (f or details see section 5 of the Annex). 
Article 3 of the Regulation requires that the amount of the Fund has to reach an 
appropriate level (target amount ) set at 9% of the total ou tstanding capital  liabilities 
arising from each operation, plus unpaid interest due. 
The amended Regulation stipulates that  operations towards accession countries 
covered by the Guarantee Fund remain c overed by the Communities guarantee after 
the date of accession. However, from that date , they cease to be external actions of 
the Communities and are covered directly  by the general budget of the European 
Union and no longer by the Guarantee Fund. 
Therefore, outstanding lending and loan gua rantee operations for third countries plus 
unpaid interest due totalled EU R 12,068,132,585.66 at 31 December 2004, of which 
EUR 144,107,751.62 was accounted for by interest due but not yet paid. 
Consequently, an amount of EUR 338,831,402.07 was repaid to the budget on 
10 January 2005, representing 9% of the out standing operations granted to the new 
Member States at 1 May 2004 (EUR 3,764,793,356.32). 
The ratio between the Fund's resources (EUR 1,612,090,715.51 - 
EUR 338,831,402.07) and outstanding capital liabi lities within the meaning of the 
amended Regulation was 10.55%. Since this is  higher than the ta rget amount of 9%, 
a repayment from the Fund to the general budget of the European  Union had to be 
made, as provided for in the third paragr aph of Article 3 of the Regulation. The 
amount to be repaid to the budget in 2005 came to EUR 187,130,000.00. 
3. P AYMENTS INTO THE FUND 
3.1. Payments from the general budget in the course of the financial year 
The legal bases for the provisi oning arrangements are desc ribed in section 1 of the 
Annex. 
The Council Regulation (EC) No 2040/2000 of 26 September 2000 (OJ L 244, 
29.9.2000, p. 27) concerning budgetary discipline authorised the entry in the general 
budget of a reserve for loan and loan gua rantee operations. This item, which was 
allocated appropriations of EUR 221 million in 2004, is used for endowing the Fund by transferring amounts into  the budget item for pa yments into the Fund. 
In line with the legal ba ses, two transfers totall ing EUR 181,875,000.00 to endow the 
Guarantee Fund were adopted by the budgetary authority in 2004. 
– Transfer DEC 34/2004
2: EUR 161,760,000.00: this first transfer was for 
payments into the Fund in respect  of the Council Decisions of 
                                                 
2 SEC(2004) 716 final. 
 
EN 5   EN 22 December 1999, 6 November 2001 and 29 April 2004 in accordance with 
the arrangements set out in the Annex to the Regulation. 
– Transfer DEC 35/20043: EUR 20,115,000.00: this second transfer was for a 
payment into the Fund in respect of a loan operatio n adopted by the 
Commission on 30 March 2004. 
The decisions covered by these transfer s are given in section 1 of the Annex. 
Both transfers were paid under the mechanis m for offsetting against the repayment of 
the Fund’s surplus which took place on 10 August 2004. 
In line with the needs identified in the Comprehensive Report on the functioning of 
the Guarantee Fund4, the Commission adopted an am endment to the Regulation of 
the Guarantee Fund to improve the rules of the provisioning mechanism, i.e. the rules 
that determine how the Fund’s assets are brough t in line with the target amount of the 
Fund5. 
3.2. Interest from financial investme nt of the Fund's liquid assets 
The Fund's liquid assets are invested in accordance with the management principles 
laid down in the Annex to the Commun ity/EIB Agreement of 23/25 November 1994, 
amended by Supplementary Agreement No 1 of 17/23 September 1996 and Supplementary Agreement No 2 of 26 April/8 May 2002. By Supplementary Agreement No 2, the investment principles were changed in 2002 in order to correct 
the excess liquidity which had risen to over 50% of the Fund's assets and was restricting the yield of the Fund. While reta ining the limit whereby at least one third 
of the Fund must be invested in short- term investments (up to one year), the 
instruments eligible for short-term liquidity were extended. They now include variable-rate securities, irrespective of thei r maturity dates, and fixed-rate securities 
with a maximum of one year remaining to  maturity, irrespective of their initial 
maturity period. This is because fixed-rate  securities are reimbursable at 100% of 
their nominal value at the end of their life  (i.e. after a maximum of one year), while 
variable-rate securities can be sold at  any time at a price approaching 100%, 
whatever their remaining period to matur ity. To maintain a balance between the 
various instruments for which liquidity  is monitored, a minimum of 18% 
(corresponding to double the provisioning rate of the Fund) is ke pt in monetary 
investments, particularly bank deposits. Th is new structure helped to improve the 
Fund's yield while maintaining a prudent liquidity level. 
In 2004, the new portfolio structure decide d in 2002 was fully implemented and an 
additional liquidity reserve was set aside in order to cover an important extraordinary payment to the budget expected to take place in the second half of  2004 or very early 
in 2005 (EUR 338,831,402.07, related to the accession of the ten new Member States). 
                                                
 
3 SEC(2004) 717 final. 
4 COM(2003) 604 final. 
5 COM(2005) 130 final. 
 
EN 6   EN The list of banks authorised to receive de posits is agreed by the Commission and the 
EIB. The original list has been regularly re vised in the light of the latest changes in 
bank ratings. Most of the ba nks are members of the euro clearing system. They all 
have a Moody's rating of at le ast A1 for long-term and P1 for short-term investments, 
or an equivalent Standard & Poor’s or Fi tch rating. The investments made with them 
are governed by rules to ensure  a good spread and to avoid the concentration of risk.  
In 2004, interest on deposits, the Guarant ee Fund current accounts, and securities 
totalled EUR 61,950,402.49, broken down as follows: 
– deposits : EUR 10,855,766.08; this repres ents the situation at 
31 December 2004 including interest received on bank deposits (EUR 11,318,130.39) and changes in accr ued interest (-EUR 462,364.31) in 
2004. The accrued interest corresponds to interest which has not been received by the Fund at the end of the year but  will be paid at the dates fixed for 
maturity of the investments. The interest accrued at 31 December 2004 
(EUR 738,069.03) is reduced by the accrued in terest entered in the accounts for 
2003 but received in 2004 (EUR 1,200,433.34). 
– current accounts
: EUR 53,933.68 comprising interest  recorded on the current 
account. 
– securities portfolio : EUR 51,040,702.73; this amount includes 
EUR 50,411,967.55 of interest on secu rities, EUR 628,735.18 of interest 
received on Commercial Paper, and EUR 26,102,214.88 of accrued interest at 
31 December 2004. The interest on securi ties is generated by investments 
placed in the form of secu rities in accordance with th e investment principles 
laid down in the Agreement giving the EIB the task of managing the Fund's liquid assets. From this figure must, however, be subtracted the 
EUR 2,845,532.15 entered in the course of the year as the difference between 
the entry price and the redemption value divided pro rata temporis  over the 
remaining life of the secu rities held (corresponding to the spread of the 
premium or discount entered in  the profit-and-loss account). 
The interest received is entered in  the results for the financial year. 
3.3. Recovery from defaulting debtors 
Late repayments by defaulting countries on operations where the Fund has honoured 
the guarantees have been paid into the Fund. The running total is now amounted to 
EUR 575,673,913.77 at 31 December 2004 as one net repayment of EUR 7,456,334.33 has been received during the year. 
4. T
HE FUND'S LIABILITIES  
4.1. Default payments 
Two calls on the Fund took place in  2004, for a total amount of EUR 4,370,582.17 
(see section 2.2.1 of the Annex). 
 
EN 7   EN 4.2. EIB remuneration 
The second Supplementary Agreement to the Agreement signed on 26 April and 8 
May 2002, lays down that the Bank's remunera tion is to be dete rmined by applying 
to each of the tranches of the Fund's assets  the degressive annual  rates of commission 
which relate to them respectively. This remuneration is calculated on the basis of the average assets of the Fund. 
The Bank's remuneration for 2004 was fixe d at EUR 765,497.93 and was entered in 
the profit-and-loss account a nd as accruals (liabilities) on the balance sheet. The 
remuneration will be paid to the EIB in the first quarter of 2005. 
4.3. Foreign exchange losses 
The Guarantee Fund realized a loss of EUR 1,260,433.70 further to a foreign 
exchange transaction of USD 10,117,515.47 (s ee section 3.3) in the context of a 
recovery from a defaulted loan.