COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 18.03.1998 
COM(1998) 168 final 
98/0117 (CNS) 
COMPREHENSIVE REPORT ON THE FUNCTIONING OF 
THE GUARANTEE FUND 
Proposal for a 
COUNCIL REGULATION (EC, EURATOM) 
Amending Council Regulation (EC, Euratom) No 2728/94 
Establishing a Guarantee Fund for external actions 
(presented by the Commission) 

-2 
TABLE OF CONTENTS 
EXECUTIVE SUMMARY 
1. INTRODUCTION 5 
2. THE FUNCTIONING OF THE GUARANTEE FUND 6 
2.1. THE AIMS OF THE GUARANTEE FUND MECHANISM 6 
2.2. PERFORMANCE OF THE GUARANTEE FUND OVER THE PERIOD 1994-97 6 
2.2.1. Protection given by the Fund against unforeseen demands on budget appropriations in the 
event of default 5 
2.2.2. Budgetary discipline 8 
2.3. CONCLUSIONS ON THE FUNCTIONING OF THE GUARANTEE FUND 9 
3. THE GUARANTEE FUND IN THE FINANCIAL PERSPECTIVE 2000-2006 THE 
COMMISSION'S PROPOSALS FOR REFORM 10 
3.1. THE TARGET AMOUNT 10 
3.2. THE PROVISIONING RATE \\ 
3.3. THE LEVEL OF THE RESERVE AND THE FUND'S CAPACITY FOR GUARANTEED LENDING 13 
3.4. REVIEW OF THE PERFORMANCE OF THE FUND 16 
3.5. TRANSFER OF THE FUND'S FINANCIAL MANAGEMENT TO THE COMMISSION 16 
3.6. IMPLICATIONS OF THE PROPOSALS FOR THE FUND'S REGULATION 17 
4. IMPLICATIONS OF MAINTAINING THE PROVISIONING RATE TO THE END OF 
THE CURRENT FINANCIAL PERSPECTIVE AND SUGGESTIONS FOR REFORM 17 
ANNEXES 
ANNEX 1 : SIMULATIONS SHOWING THE POSSIBLE DEVELOPMENT OF THE 
GUARANTEE FUND OVER THE PERIOD 1998-2006 
ANNEX 2 : FINANCIAL DATA ON THE GUARANTEE FUND OVER 
THE PERIOD 1994-1997 
PROPOSAL FOR A COUNCIL REGULATION (EC, EURATOM) No of 
Amending Council Regulation (EC, Euratom) No 2728/94 
Establishing a Guarantee Fund for external actions 
COMMISSION REPORT ON THE GUARANTEE FUND 
EXECUTIVE SUMMARY 
This report is presented pursuant to the Regulation which set up the Guarantee 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. 
This report takes stock of the Fund's operation since it was set up in 1994. On the basis 
of the conclusions drawn from this stock-taking the Commission is putting forward 
proposals for adjustments to certain of the Fund's parameters over the period covered by 
the next financial perspective. 
1. The results of the first few years of the Fund's operation indicate that the objectives 
pursued have been attained within the parameters laid down by the rules governing 
the Fund. 
- As regards the protection of budget appropriations, the Fund's resources have 
been sufficient to prevent any budgetary impact. Had it not been for the 
Guarantee Fund, the budget would have had to intervene directly to cover 
defaults totalling ECU 410 million, which would have disrupted the 
implementation of the budget. 
- As regards budgetary discipline, the mechanism whereby the Fund is endowed 
from the reserve (for which a ceiling is set over the period of the financial 
perspective) has provided an effective framework for controlling new decisions 
by the Council on loans to non-member countries. 
At the end of 1997 the Fund had reached its target amount, namely 10% of the 
Community's outstanding liabilities arising from guaranteed loans, i.e. 
ECU 862 million. 
2. In the light of the above considerations, the Commission is proposing that the 
Regulation setting up the Guarantee Fund be amended and that the amount of the 
guarantee reserve for the period of the next financial perspective be reviewed 
accordingly. 
• Amendments to the Regulation 
The Fund's target amount should be reduced from 10% to 8%. The quality of the 
various loans guaranteed by the Community would justify a reduction in the target 
amount. Since 1994 the actual level of Guarantee Fund disbursements has been less 
than 5% of outstanding loan liabilities. Experience shows that a target amount of 5% 
would have been sufficient to cover the defaults. Given the uncertainty surrounding 
future risks the Commission proposes setting the Fund's target amount at 8%, taking 
• -4 
the view that this would give the Fund a reasonable safety margin for protecting the 
budget. It should be stressed that this safety margin is widened by the back-up 
possibility offered by the budgetary reserve if the guarantees called in exceed the 
amount available in the Fund. 
The provisioning rate should be set at 6%. Now that the Fund is well established, it 
should be stabilised at its target amount, which would mean that any changes in the 
Fund should closely reflect the trend in the loans guaranteed. If the provisioning rate 
were held at its present level of 14%, the Fund would build up substantial surpluses 
and the contributions required from the Member States would be excessive. A sharp 
reduction in the provisioning rate would slow down the Fund's expansion. The 
simulations for the period 2000-2006 (attached to this report) show that a 6% 
provisioning rate would be sufficient to maintain the Fund at its target amount. 
Reduction in the reserve for guarantees entered in the budget for the period of the 
next financial perspective 
To continue to provide appropriate financial cover for loans to non-member countries 
guaranteed by the general budget at their present level of around ECU 2,500 million 
per year, a cut in the provisioning rate to 6% should be accompanied by a 
proportional decrease in the reserve to ECU 150 million. 
Before the end of the period covered by the next financial perspective, the 
Commission proposes a review of the Fund's parameters in the light of possible 
changes in the risks covered by the Fund following enlargement. 
Review of the provisioning rate 
Article 4 of the Regulation stipulates that the provisioning rate is to be reviewed 
"when the Fund reaches its target amount, and in any case no later than the end of 
1999". Now that the Fund has reached its target amount, the Commission proposes 
that the measures advocated above should be adopted in advance of that date and 
apply from 1999 onwards, given the financial advantages to the Member States. If 
the Council should decide on this course, certain provisions of the Regulation setting 
up the Fund will have to be amended as soon as possible; given the impact of these 
measures on financial discipline, the Commission proposes that in 1999 the level of 
the guarantee reserve should be reduced to ECU 150 million by interinstitutional 
agreement. 
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1. INTRODUCTION 
Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 established a 
Guarantee 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. Article 9 of the Regulation stipulates that "the 
Commission is to submit, before 31 December 1998, a comprehensive report on the 
functioning of the Fund". 
This report addresses three topics: 
- The functioning of the Fund 
The Commission presents a brief analysis, in the light of the experience gained over the 
period 1994-97, of the results achieved by the Fund as compared with the objectives set. 
- The proposals for reforming the functioning of the Fund 
On the basis of its findings, the Commission puts forward proposals for the reform of 
the Fund over the period covered by the next financial perspective. 
- The review of the provisioning rate 
Article 4 of the Regulation stipulates that "the provisioning rate is to be reviewed when 
the Fund reaches its target amount, and in any case no later than the end of 1999". 
The Guarantee Fund having reached its target amount on 31 December 1997, the 
Commission recommends that the proposals for the reform of the Fund should be 
applied ahead of their formal adoption. 
The annexes to this report set out financial data relating to the Fund's results over the 
period 1994-97 and present simulations on the development of the Fund over the period 
1998-2006. 
The Commission attaches a proposal for the amendment of Council Regulation (EC, 
Euratom) No 2728/94 of 31 October 1994 establishing the Guarantee Fund. 
2. THE FUNCTIONING OF THE GUARANTEE FUND 
2.1. The aims of the Guarantee Fund mechanism 
Set up at a time when the guarantees on loans granted to non-member countries were 
growing rapidly, the Guarantee Fund and the Reserve for Guarantees were intended: 
- to provide the Community with an instrument to protect against the budgetary impact 
of Community guarantees being called in; 
- to create an instrument of budgetary discipline by laying down a financial framework 
for the development of the Community policy on lending/borrowing and guarantees 
for EIB loans to non-member countries. 
2.2. Performance of the Guarantee Fund over the period 1994-97 
2.2.1. Protection given by the Fund against unforeseen demands on budget 
appropriations in the event of default 
The Guarantee Fund has prevented any substantial disruption of budget implementation 
which would have inevitably occurred as a result of the defaults on payments to the 
Community since 1994 (such defaults totalled ECU 410 million). Chart 1 shows how 
the Fund has succeeded in absorbing the impact of guarantee costs despite its fragile 
position during the start-up phase. 
294,2 
74,16 
1/95 Chart 1 
Cover of defaults by Fund resources 
(ECU million, at half-yearly intervals) 
456,19 474,6 
228,9 300,8 
42,8 9,75 557,4 
48,2 
2/95 1/96 2/96 1/97 
D Calls on Fund D Fund resources 537,9 
6,1 1 
2/97 
Source: Commission services 
Had it not been for the Guarantee Fund (on which forty calls have been made since its 
establishment), the Community would repeatedly have had to use budgetary resources 
to provide the necessary guarantees and this would have required redeployment of 
appropriations in the course of budget implementation. 
The tables in Annex 2 provide details of the financial movements which have affected 
the Fund and resulted in it reaching its target amount (10% of guaranteed liabilities) by 
the end of 1997. Several factors have contributed to the Fund's rapid growth: 
- Substantial payments from the reserve: between 1994 and 1997, aggregate 
payments into the Fund from the reserve totalled ECU 1,066 million, as compared 
with ECU 7,405 million in new loans guaranteed, i.e. an average provisioning rate of 
14.4% (see Annex 2). The resources generated by the investment of Fund resources 
also made a significant contribution to the growth of the Fund. By the end of 199"7 
these new resources totalled ECU 78.35 million, or 1% of liabilities; 
- Defaults covered by the Fund since 1995: as is shown by Table 1 below, the level of 
disbursements from the Fund (aggregate disbursements, net of reimbursements) has 
never exceeded 5% of liabilities for guarantees. The highest percentage (4.8% in 
June 1996) was the result of defaults on the food aid loan to the CIS Republics. That 
loan could be classified as an extreme risk, however, given its short-term nature and 
the relative insolvency of certain beneficiaries. 
Table 1 
Disbursements from the Fund 
as a percentage of total loan liabilities 
ECU million 
i 1. Disbursements 
2. Liabilities'*> 
3 = 1 as % of 2 Mar 
1995 
33 
6,01 9 
0.55 Jun 
1995 
39 
5,724 
0.69 Sep 
1995 
43 
5,811 
0.75 Dec 
1995 
267 
6,231 
4.29 Mar 
1996 
273 
5,934 
4.59 Jun 
1996 
293 
6,116 
-jSt ii Sep 
1996 
28! 
6,351 
4.42 Dec 
1996 
264 
6,696 
3.95 Mar 
1997 
290 
7,103 
4.08 Jun 
1997 
295 
7,581 
3.89 
(*) Total outstanding capital liabilities, increased by unpaid interest due, as defined in Article 3 of t 
establishing the fund. The rate of increase over the period 1995-97 was 2.7% of liabilities for loans 
minus reimbursements), as calculated at 31 December 1997. Sep 
1997 
295 
7.918 
3.73 
he Regu 
kdisbursei Dec 
1997 
291 
7,961 
3.65 
ation 
nents 
Source: Commission services 
- The stability of guarantee disbursements from the Fund: disbursements from the 
Fund have remained stable since December 1995, ranging from ECU 264 million to 
ECU 291 million. These figures do not reveal the financial flows in the opposite 
direction: of the ECU 410 million disbursed in guarantee cover, ECU 136 miUion 
was recovered by way of late reimbursements (see Annex 2); 
- The total risks covered by the Fund have increased only slightly since 1994. 
guarantee liabilities rose from ECU 7,600 million in 1994 to ECU 7,%0 million at 
the end of 1997, i.e. an increase of 4.5%. Over the same period the Fuid itself grew 
at an average annual rate of 47%. These different rates of increase explain why the 
Fund exceeded its target amount (10% of liabilities on loans) within three years. Yet 
there has been no decrease in lending activities since 1994; indeed, the volume of 
new guaranteed operations approved by the Council has increased by 
ECU 7,405 million (disbursements for these operations are spread over several 
years). Over the same period, however, the amounts reimbursed on earlier 
guarantees have amounted to ECU 3,100 million. 
2.2.2. Budgetary discipline 
The mechanism whereby resources are transferred to the Fund at a specific provisioning 
rate, from a reserve set at ECU 300 million (1992 prices) for the duration of the 
financial perspective, necessarily places limits on the annual capacity for guaranteeing 
new operations. Given the level of the reserve entered in the 1997 budget, this annual 
limit was ECU 2,350 million in 1997.1 
The discipline imposed by the Fund mechanism showed its effectiveness when the 
Council came to discuss the medium-term programming of the new EIB lending 
envelopes. In its conclusions of 2 December 1996 the Council emphasised that the 
volume of external lending would have to be in line with the financial perspective and 
with Community budgetary discipline. The new EIB mandates and the overall limits for 
Euratom loans and financial assistance were fixed for a three-year period subject to the 
annual ceilings resulting from the mechanism.2 This constraint has nevertheless been 
compatible with the Union's political ambitions as defined at the Essen, Cannes and 
Madrid European Councils, namely to increase Community support for non-member 
countries in the form of EIB loans (the new EIB mandate represents a 30% rate of 
increase). 
The level of the reserve is fixed for the duration of the current financial perspective, so 
that any reduction in the provisioning rate would have the effect of casing the original 
constraint. Since the Regulation establishing the Fund required the provisioning rate to 
be reviewed once the Fund had reached its target amount, the Council expressed the 
hope that the provisioning rates could be kept at their present level until 1999 in order to 
maintain budgetary discipline.3 
Calculated on the basis of a reserve of ECU 329 million and a provisioning rate of 14%. 
Conclusions of the Council of 27 January 1997: "The EIB lending envelopes covered by a 
Community guarantee are consistent with a provision of ECU 1,050 million for macro-financial 
assistance (MFA) assuming that ECU 750 million is needed for Euratom lending. The maximum for 
MF A will be increased to ECU 1,200 million if Euratom lending in the period of consideration does 
not exceed ECU 600 million. " 
According to the Council's conclusions of 2 December 1996, the provisioning rates for the 
Guarantee Fund were to remain at their present levels until 1999. According to the Council's 
conclusions of 27 January 1997, "each payment to the loan guarantee fund will be based on the 
percentage required at the time of payment, that is 15% currently and 14% as soon as feasible". 
9-
2.3. Conclusions on the functioning of the Guarantee Fund 
Now that the Fund mechanism has been in operation for a few years, it is clear that the 
objectives pursued have been attained with the parameters defined in the Regulation 
setting up the Fund. During the start-up phase it was essential to ensure that the Fund 
grew as rapidly as possible to a si/,c commensurate with the risks to be covered. Such 
expansion was also necessary because the Fund had to cover the risks attaching to loans 
granted before the date of its entry into force. After only three years the Fund has 
reached its target amount. The quality of the various loans guaranteed (on which the 
default rate is low) and the Fund's sound financial position (availabilities totalling 
ECU 862 million) would justify the adjustment of certain parameters to prevent the 
Fund growing to an excessive size. 
3. 10 
THE GUARANTEE FUND IN THE FINANCIAL 
THE COMMISSION'S PROPOSALS FOR REFORM PERSPECTIVE 2000-2006. 
Over the next Financial Perspective the Guarantee Fund ought to, 
- first, have adequate but not excessive resources at its disposal in order to be 
financially viable in the event of unforeseen large calls to support defaults on 
guaranteed loans; and 
- secondly, it ought not make excessive calls on the Member States in the financing of 
the Reserve for Guarantees. These considerations must also be consistent with the 
ability of the Fund to support the desired level of external financing by the EU in the 
future. 
Table 2 
Determinants of Guarantee Fund's capacity to support loans to third countries 
(in Ecu millions) 
(1) Reserve for guarantees 
(2) Provisioning rate 
(3) Annual effective capacity 
at 100% guarantee [(3) = (1)/(2)] Financial Perspective 1993-1999 
1992 
1992 prices 
300 (a) 
14% (c) 
2,140 1997 
1997 prices 
329 (b) 
14% 
2,350 Forecast 1999 
1999 prices 
346 (b) 
14% 
2,471 Financial f erspecflye 2000||(| 
,;j; ;:;:a|'9|i;|irk^s ^l; 
:'- : m 
6% 
2,500 
a) Edinburgh European Council - Reserve for guarantees fixed in 1992 prices; 
b) amount of the Reserve for guarantees after technical adjustment; 
c) provisioning rate fixed by Regulation No 2728/94 of October 31,1994 establishing the Guarantee Fund for external actions. 
Source: Commission services 
Table 2 presents data on the determination of the Fund's maximum guaranteeing 
capacity in view of the constraints set out in the Edinburgh decision and Regulation 
2728/94. The annual capacity of the Fund to provide 100% guarantee over the period 
2000-2006 is determined by the combination of a Reserve of Ecu 150 million and a 
provisioning rate of 6%, as proposed below. 
3.1. The target amount 
The Fund's performance over the past four years suggests that a target amount of 10% 
would be too large relative to default risks. Moreover, experience so far suggests that 
while the Fund could ultimately suffer losses as a result of defaults in practice it has 
served a bridging function for the period between default and re-financing of defaulted 
loans. This would suggest that a target amount of 10% is inevitably too high both from 
the perspective of the risks themselves and from the transitional function the Fund has 
so far performed. 
-11 
The target amount over the next Financial Perspective is proposed to be 8% of 
guaranteed liabilities. This level, which is significantly higher than the 4.79% realized 
worst calls on the resources of the Fund of June 1996 (see Table 1), is both consistent 
with prudential considerations and with Fund resources that are not excessively large 
relative to default risks. The proposed target amount is expected to provide adequate 
resources to safeguard against risks associated with future macro-financial assistance, 
and those related to the considerable exposure to countries of notable political and 
financial risk (Algeria, Bulgaria, Ukraine). Such risks, and a deterioration of the EIB's 
portfolio, may also arise from an extension of guaranteed credit to Newly Independent 
States (NIS). Maintaining a target amount of 8% appears to be an appropriate prudential 
measure. 
It is essential to provide for events where the Fund's resources exceed or fall short of the 
target amount. In parallel to the current practice4, it is proposed that resources in excess 
of 8% be transferred to the EU budget. Should the Fund's resources fall below 75% of 
the target amount (6% of outstanding liabilities), it is proposed that the provisioning 
rate on new lending increase automatically to 7% until the target amount is achieved. 
Finally, should resources fall below 50% of the target amount the Commission will 
prepare a report and suggest exceptional measures necessary to replenish the 
Guarantee Fund. 
3.2. The provisioning rate 
The provisioning rate of 14% was intended to be transitional, until the Fund reached the 
target amount of 10%, and then would also decline to that level. Consistent with the 
proposal to lower the target amount to 8%, the provisioning rate must also be revised 
downwards. This revision ought also to take into account the growth in the Fund's 
non-reserve resources. 
Non-Reserve resources consist of interest income and late reimbursements of capital 
and interest. The availability of such resources imply that the provisioning rate can be 
lower than what would be otherwise required in order to sustain the target amount of the 
Fund; alternatively, it will be possible to maintain the strength of the Fund as in the 
current Financial Perspective while, at the same time, calling on less resources to 
finance the Reserve for guarantees. 
In 1997 alone, interest income amounted to Ecu 34.5 million or 0.4% of the stock of 
loans guaranteed while, over the period 1994-1997, cumulative interest income 
amounted to Ecu 78.4 million; also in 1997, late reimbursements amounted to Ecu 45 
million or 0.6% of the stock of guaranteed loans, while the cumulative value of late 
reimbursements over the period 1994-1997 was equal to Ecu 136.4 million5. At the end 
4 See Article 3 of Regulation 2728/94 of 31 October 1994. 
5 See Annex 2 for details. 
12 
of 1997, therefore, income from these sources was equivalent to marginally over 1% of 
the stock of guaranteed loans. 
Graph 2 
Relationship between actual and target amounts under different scenarios 
(data as percent of outstanding guaranteed liabilities) 
12 f 
10 A Gross amount at 14% 
Gross cumulative amount at 6% 
Gross amount at 6% 
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 
Gross amount at 14%: Fund resources in year t prior to reimbursement to the budget in year t+1 ; 
provisioning rate 14% ; 
Gross cumulative amount at 6%: Fund resources without reimbursement to the budget ; provisioning rate 6% ; 
Gross amount at 6%: Fund resources in year t prior to reimbursement to the budget in year t+1 ; 
provisioning rate 6%. 
Source: Commission services ; see Annex 1 for the details of the simulations. 
Simulations show that, in view of non-Reserve resources, a provisioning rate of 6% is 
sufficient to endow the Fund with resources which are consistent with the target 
amount. 
Key results of the simulations are presented in Graph 2 - the complete results are 
presented in Annex 1. The Fund's performance is depicted by three characteristics: 
- First, gross resources, that is resources without transfers to the EU budget, under the 
assumption that the provisioning rate is set at 14% (denoted as "gross amount at 
14%"); 
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- secondly, under the assumption that no transfers to the budget take place, the Fund 
accumulates funds in excess of the target amount; under a provisioning rate of 6% 
this is denoted as "gross cumulative amount at 6%"; 
- finally, Fund resources net of transfers to the EU budget under a provisioning rate 
6% are denoted as "gross amount at 6%"; the surplus in year / is transferred to the 
budget in year t+1 and this is shown in the Graph by the marked area. The target 
amount is set at two levels, 10% for the period 1997-1998 and 8% over the period 
1999-2006; a step decline is shown between 10% and 8% in 1999-2000 in the Graph. 
The results show that with a provisioning rate of 14% the Fund would transfer large 
surpluses in excess of the mark of 10% to the EU budget over much of the whole period 
(the average amount is estimated to be Ecu 222 million). With the reduction in the 
provisioning rate to 6% the gross resources of the Fund remain generally above 9% of 
liabilities. Finally, the net resources of the Fund decline only temporarily below the 8% 
mark (to a trough of 7.63% in 2001) but they subsequently recover to the proposed 
target amount. Note that the surplus transferred to the budget after 2002 increases over 
time. The decline in the ratio of Fund resources to liabilities 2001 is principally a 
reflection the rapid increase in the stock of guaranteed loans at the beginning of the new 
financial envelopes on which the simulations have been based6. This increase reflects 
disbursements related to the renewal of the EIB mandates for three years 1997-1999. 
The tendency of the Fund's resources to increase relative to guaranteed liabilities is 
partly a reflection of the provisioning mechanism itself. As long as provisioning for new 
loans takes place independently of repayments, the ratio of Fund resources to liabilities 
will tend to remain constant or increase unless the growth of new loans is greater than 
the growth in repayments. Over the horizon to 2006, simulations show that 
disbursement of new loans will peak in the beginning of next century and from 2003 
onwards will decline; on the other hand, repayments arc expected to follow an upward 
trend throughout the post-2002 period - see the results in Annex 1. 
3.3. The level of the Reserve and the Fund's capacity for guaranteed lending 
It was noted previously that a rate of provisioning of 6% would be appropriate for the 
period covered by the new Financial Perspective. To determine the appropriate level of 
the Reserve, it is essential to consider the desired volume of new lending which will be 
subject to guarantee. While difficult to determine it ex ante with confidence, it is 
possible to take guidance from factors likely to play a role in determining developments 
in guaranteed loans in future years. 
Between 1992 and 1999 the Reserve for guarantees7 will have increased in nominal 
terms by Ecu 46 million to Ecu 346 million, or on average by 2.2% annually. The 
See the details in Annex 1 
7 The Reserve for guarantees was defined in the Edinburgh European Council of December 1992 even 
though the Guarantee Fund itself was not established until October 1994. 
-14-
corresponding maximum capacity for fully guaranteed loans during this period has 
advanced by a comparable growth rate. At the same time, over the period 1994-1997 the 
rate of utilization of the Reserve averaged 82.2%, clearly signalling that Reserve 
adequacy was not a binding constraint on guaranteed credit expansion. 
Table 3 
Annual capacity of the Guarantee Fund and projected growth in guaranteed loans 
(Ecu million) 
Annual value of the Reserve (a) 
Annual capacity (a) 
Projected increase in guaranteed loans (b) 
Annual utilization of the Reserve (c) 2000 
150 
2,500 
2,293 
0.92 2001 
153 
2,550 
2,293 
0.90 2002 
756 
2,600 
2,293 
0.88 2003 
159 
2,650 
2,293 
0.87 2004 
762 
2,700 
2,293 
0.85 2005 
766 
2,767 
2.293 
0.83 2006 
769 
2,820 
2,293 
0.81 Average 
2000-2006 
759 
2,655 
2,293 
0.87 
(a) Determined by an annual increase of the GNP deflator of 2%, as proposed in Agenda 2000; (b) determined according to 
the calculations reported in Annex 1; account has been taken of the 70% guarantee for EIB loans; other loans enjoy a 
100% guarantee; the projected increase refers only to new loans subject to a guarantee and it excludes loans which have 
been signed in earlier years and for which the Fund has already been provisioned; (c) ratio of the value of the Reserve 
necessary to support the projected growth in guaranteed loans (the product of the projected increase in guaranteed loans 
times the provisioning rate of 6%) relative to the total value of the Reserve; estimates are rounded. 
Source: Commission services 
For the new Financial Perspective, it is assumed that it will be necessary to support 
with guarantees an annual flow of lending comparable to that of the last years of the 
current Financial Perspective. Given the provisioning rate of 6%, a Reserve endowment 
of Ecu 150 million per year would make possible the extension of guaranteed loans of 
Ecu 2,500 million (1999 prices) annually over the period 2000-2006 at 100% 
guarantee. Assuming that the reserve is growing annually by 2.0% (the growth rate of 
the GNP deflator assumed in Agenda 2000), by the end of the next Financial Perspective 
the capacity for guaranteed loans is estimated to be Ecu 2,800 million. However, 
various factors, as discussed below, could give rise to an increase, but they could 
equally likely lead to a fall, in demands for guaranteed loans. 
To judge the adequacy of the proposed level of the Reserve, Table 3 presents estimates 
of the value of the Reserve and of the Fund's annual capacity to guarantee loans, as well 
as estimates of the increase in the stock of guaranteed liabilities over the next Financial 
Perspective. The Reserve is assumed to grow by 2% per year. The increase in 
guaranteed loans is based on the projections reported in Annex 1. Note that in the latter 
estimates a distinction has been made between loans subject to 100% guarantee and EIB 
loans subject to 70% guarantee. 
This comparison suggests that the Fund's capacity always exceeds the projected growth 
in lending. During the whole period, the average capacity of the Reserve equals Ecu 
2,618 million while the average value of projected lending equals Ecu 2,293 million; the 
required Reserve to support the latter is Ecu 138 million. 
It is uncertain whether the annual flow of guaranteed credit of Ecu 2,500 million, 
projected under the Commission proposal, will be adequate to meet all eventualities 
-15-
over the period 2000-2006. At this stage, the projected margin suggested in Table 3 
appears to be adequate. The present EIB envelopes will permit a significant amount of 
lending to CEECs which will complement the pre-accession strategy, and following 
enlargement EIB lending will not need to be guaranteed. Moreover, Euratom and 
macrofinancial assistance lending amounting to around Ecu 600 million per year would 
appear to be adequate. Changes may occur following enlargement but until then there 
are no compelling reasons to permit the Fund's capacity to increase significantly above 
present levels. 
Over the next Financial Perspective there may be reasons favoring either a decrease or 
an increase in guaranteed lending. On the one hand, under the assumption that following 
enlargement third-country lending will not expand, the need for guaranteed credit, after 
peaking at the time of the next enlargement, will be reduced. 
On the other hand, it is possible that credit in the form of either macro-financial 
assistance or Euratom loans will increase. Moreover, it is possible that EIB lending to 
Russia and other NIS will be initiated. In the area of macro-financial assistance it is 
possible that it will be necessary to provide increased support to Ukraine but also to 
other important EU neighbors such as Turkey, Albania, Bulgaria and the nations of the 
ex-Yugoslavia. Demands to increase Euratom loans, especially in favor of Ukraine but 
also in favor of Bulgaria, may also become substantial over coming years. 
Moreover, demands for EIB lending may increase both in the context of reinforcing the 
EIB/CEEC envelopes and taking account of the possibilities of enlarging the MED 
programs, increasing loans in favor of Turkey and extending loans to support energy 
projects in the Mediterranean. 
It is possible, finally, that the risk the Fund's portfolio is bearing may increase. With 
enlargement, some currently third countries will become Member States. An expansion 
of guaranteed lending towards a widening group of Eastern European countries, or 
towards countries of lesser creditworthiness, could raise the risks of default causing a 
deterioration in the Fund's portfolio8. 
The stock of loans outstanding with to Hungary, Poland, the Czech Republic, Slovakia and Slovenia 
in 2002 is estimated at Ecu 6,020 million. This estimate is based on the assumption that 77% of the 
envelop decided buy the Council on April 14, 1997 in favor of the CEECs (Ecu 3,520 million) will be 
allocated to the five countries. The stock of guaranteed loans to the remaining countries, that is 
excluding the five candidates, is estimated at Ecu 13,137 million at the end of 2002, and the total 
stock at that time is estimated at Ecu 19,157 million. 
Since accession to the EU reduces the resources the Guarantee Fund needs to hold to meet defaults on 
these loans by an amount equal to the Fund's target amount, it is clear that at some point following the 
first wave of accessions the Guarantee Fund would have to reimburse this amount to the EU budget. 
On the hypothesis that the new Member States constitute better risks that those still remaining within 
the framework of pre-accession or those not considered for membership at all, it is clear that the 
quality of the Fund's risk portfolio will worsen, perhaps significantly. 
- 16-
3.4. Review of the performance of the Fund 
It is possible that, over the next Financial Respective, the parameters of the Guarantee 
Fund may need to be modified. In particular, to respond to the possibility that the risks 
to which the Fund is exposed are changing in the years following enlargement it is 
necessary to provide for a review of its operation. Accordingly, the Commission is 
proposing that it would be appropriate to review the performance of the Guarantee Fund 
at some point before the end of the next Financial Perspective. This review should take 
the form of a Commission Report to the Council. 
3.5. Transfer of the Fund's financial management to the Commission 
As required by the Regulation establishing the Fund,9 the Commission gave the EIB the 
task of managing the Fund's resources on behalf of the Community.10 
Experience has shown that although the Bank has performed this task most satisfactorily 
over the past three years, in practice a good deal of assistance has to be provided by the 
services of the Commission. It would therefore be in the Commission's interest to take 
over the management of the Fund. 
- With a view to administrative simplification 
* The Commission makes a substantial contribution to defining the principles 
governing the management of the Fund: since the EIB's investment management 
must comply with the usual prudential rules for financial activities, the EIB 
frequently has to consult the Commission on investment strategy; 
* Since the Commission alone has an overview of the guarantees concerned, it has 
to send the EIB monthly forecasts on how the Fund will develop over the next 
twelve months. The Bank needs this information to gauge the optimum duration 
for the Fund's financial investments; 
* The Commission keeps track of the repayment dates for loans and borrowings, 
makes the arrangements for calls on the Fund, and monitors the recovery of sums 
due and the reimbursement to the Fund of the corresponding amounts. As things 
stand, all the relevant information has to be made available before the Bank can 
act, entailing a pointless duplication of the workload. Apart from the gains in 
productivity, direct management by the Commission would shorten the timespan 
needed for the transfer of resources and the dissemination of information. 
10 Article 6 of Council Regulation No 2728/94 establishing a Guarantee Fund for external actions 
stipulates that "the Commission shall entrust the financial management of the Fund to the EIB under 
a brief on the Community's behalf. 
Agreement between the European Community and the European Investment Bank concerning the 
management of the Guarantee Fund, signed on 23 and 25 November 1994. 
-17-
- With a view to reducing costs 
* The Commission would save the charges currently paid to the EIB, which 
amounted to ECU 325,000 in 1997 and total ECU 710,000 since the Fund was set 
up in 1995. 
This charge would be bound to increase with the level of capital managed by the 
Fund as a result of fresh EC or Euratom loans to the countries of Eastern and 
Central Europe. 
The Commission, which has considerable experience in dealing with such matters on 
behalf of other Community institutions, proposes therefore that it itself should manage 
the investment of the Fund's resources and that Article 6 of the Regulation establishing 
the Fund should be amended accordingly. 
3.6. Implications of the proposals for the Fund's regulation 
Adoption of the Commission's proposals will require a corresponding revision of the 
Regulation governing the Guarantee Fund. This will take the form of a new Regulation 
based on a revision of the present Regulation. The text of the proposed amended 
Regulation is attached separately. 
4. IMPLICATIONS OF MAINTAINING THE PROVISIONING RATE TO THE END OF THE 
CURRENT FINANCIAL PERSPECTIVE AND SUGGESTIONS FOR REFORM 
The Ecofin Council has proposed that the provisioning rate ought to remain at the level 
of 14% to 15%) until the end of the current financial perspective". The implication of 
this is that, with the Fund having currently attained its target amount, and in view of the 
non-Reserve resources, which are expected to correspond to over 10% of the Reserve 
for guarantees and of total new Fund resources in each of the next two years, 
maintaining the provisioning rate at this level would tend to enrich the Fund 
considerably without a corresponding increase in risk. Furthermore, according to Article 
3 of Regulation 2728/94, Fund resources at the end of the year in excess of the 10% 
mark are to be paid back to the EU budget. As a result, a situation would arise where the 
Reserve would be called upon to provision the Fund which would in turn reimburse the 
budget. 
11 See Ecofin conclusions, SN 1247/1/97 of January 27, 1997. 
-1 
Table 4 
The Guarantee Fund 1998-1999 with a provisioning rate of 14% 
(Ecu million) 
Operations Situation 
December 31, 1997 Situation 
December 31, 1998 Situation 
December 31, 1999 
Provisioning rate: 14% 
Credits 
- Transfers from Reserve 
- Interest income 
- Late reimbursements 
Total resources 
Debits 
- Defaults 
- EIB commissions 
- Surplus transferred to EU budget Stocks 
1,065.96 
78.36 
136.38 
1,280.70 
409.90 
0.71 Flows 
312.05 
43.09 
0.00 
345.14 
0.00 
0.43 
65.69 312.83 
57.04 
0.00 
369 87 
0.00 
0.57 
172.00 
Source: Commission services 
Simulation results presented in Table 4 highlight this point — see also Graph 212. The 
results suggest that interest income will amount to 12.5% of the Fund's total new 
resources in 1998 and 15.4% in 1999. Furthermore, the simulation shows that the Fund 
would make transfers to the EU budget of Ecu 66 million in 1998 and Ecu 172 million 
in 1999. It is evident that a provisioning rate of 14% would require that an unnecessarily 
large amount of funds is called from the Member States. Consistent with the proposals 
outlined for the next Financial Perspective, it is proposed that the Council consider 
adopting the provisioning rate of 6% already from 1999. 
To ensure that the reduction in the provisioning rate, if endorsed by the Council, does 
not endanger budgetary and financial discipline, it is essential that an effective ceiling 
be introduced to constrain the enlarged possibilities for extending guaranteed credit. The 
ceiling can take the form of establishing a maximum level for the reserve, clearly lower 
than its total value, that can be used for the purpose of credit guarantees in 1999. The 
proposed maximum level of the reserve is ECU 150 million. 
This ceiling ensures continuity between the Fund's annual capacity under the old regime 
and that under the new regime governing the provisioning rate. In particular, with a 
provisioning rate of 14% and the reserve projected to be ECU 346 million in 1999, the 
capacity for fully guaranteed lending is ECU 2 471 in 1999; the same capacity is 
obtained with a provisioning rate of 6% and a reserve of ECU 150 million. 
The Commission is proposing that: 
12 Detailed results and the assumptions used in these simulations are presented in Annex 1. 
19-
the provisioning rate for the Fund be set at 6% as soon as possible. It therefore 
suggests that all the proposed amendments to the Regulation of 31 October 1994 
establishing a Guarantee Fund should enter into force on 1 January 1999; 
that lending capacity be left unchanged with the guarantee reserve being cut from 
ECU 338 million in 1998 to ECU 150 million in 1999 and that the existing financial 
perspective be amended by interinstitutional agreement. 
20-
Simulations showing the evolution of the Guarantee Fund over the period 1998-2006, on the basis of three scenarios: 
1) target amount at 10%, provisioning rate at 14% and repayment to the budget of the Fund s surplus over the target amount (scenario A) 
2) provisioning rate at 14% in 1998 and at 6% over the period 1999-2006. No repayment to the budget (scenario B) 
3) target amount at 8%, provisioning rate at 14% in 1998 and at 6% 
(scenario C) 
Situation at 
31.12.97 
Guarantee liabilities on the basis of: (a) 
1. decisions already adopted by the Council (b) 7,961.00 
2. new decisions planned (c) 
3. Total liabilities (3 = 1.+ 2.) 7,961.00 
Scenario A 
4. Gross amount of the Fund (d) 861,79 
5. Gross amount of the Fund as % of 3. 10.83 
6. Target amount at 10% (3.*10%) 796.10 
7. Surpluses repaid to the budget in n+1 (4.-6.) 65.69 
Scenario B 
8. Cumulative gross amount of the Fund (e) 861.79 
9. Cumulative gross amount of the Fund as % of 3. 10.83 
Scenario C 
10. Gross amount of the Fund (d) 861,79 
11. Gross amount of the Fund as % of 3. 10.83 
12. Target amount at 10% for 1998 (3.*10%) 
13. Target amount at 8% over 1999-2006 (3.*8%) 796.1 
14. Surpluses repaid to the budget in n+1 (10.-12.) 65.69 Estimate for 
31.12.98 
9,483.00 
205.00 
9,688.00 
1,140.81 
11.78 
968.80 
172.01 
1,206.50 
12.45 
1,140.81 
11.78 
968.8 
172.01 ANNEX 1 
over the period 1999-2006. Repayment to the budget of the Fund's surplus over the target amount 
Estimate for 
31.12.99 
11,207.00 
637.00 
11,844.00 
1,338.10 
11.30 
1,184.40 
153.70 
1,400.29 
11.82 
1,159.34 
9.79 
947.52 
211.82 Estimate for 
31.12.2000 
13,404.00 
1,119.00 
14,523.00 
1,613.74 
11.11 
1,452.30 
161.44 
1,625.22 
11.19 
1,160.52 
7.99 
1,161.84 
0.00 Estimate for 
31.12.2001 
15,671.00 
2,089.00 
17,760.00 
1,853.14 
10.43 
1,776.00 
77.14 
1,843.23 
10.38 
1,355.53 
7.63 
1,420.8 
0.00 Estimate for 
31.12.2002 
15,901.00 
3,543.00 
19,444.00 
2,188.79 
11.26 
1,944.40 
244.39 
2,072.06 
10.66 
1,560.22 
8.02 
1,555.52 
4.70 Estimate for 
31.12.2003 
15,641.00 
5,650.00 
21,291.00 
2,373.71 
11.15 
2,129.10 
244.61 
2,312.19 
10.86 
1,770.31 
8.31 
1,703.28 
67.03 Estimate for 
31.12.2004 
14,648.00 
8,315.00 
22,963.00 
2,567.56 
11.18 
2,296.30 
271.26 
2,564.20 
11.17 
1,928.47 
8.40 
1,837.04 
91.43 Estimate for 
31.12.2005 
12,991.00 
11,191.00 
24,182.00 
2,744.46 
11.35 
2,418.20 
326.26 
2,828.72 
11.70 
2,070.10 
8.56 
1,934.56 
135.54 ECU million 
Estimate for 
31.12.2006 
11,445.00 
13,853.00 
25,298.00 
2,875.01 
11.36 
2,529.80 
345.21 
3,106.30 
12.28 
2,174.59 
8.60 
2,023.84 
150.75 
Source: Commission services 
-21 -
Assumptions made for the purposes of the table in Annex I 
(a) Definition of guaranteed liabilities: liabilities are defined as the sum of disbursements, net of repayments obtained from the beneficiaries of loans. 
For the purposes of calculating the target amount within the meaning of Article 3 of the Regulation, the adjusted liabilities are obtained by increasing loan 
liabilities by the amount of unpaid interest due. Liabilities have been increased by the equivalent of three months ' unpaid interest due. 
Calculation of liabilities: * For borrowing lending operations, disbursement in rwo instalments over two years and reimbursement of the capital as from the sixth 
year, in five equal annual instalments; 
* For EIB operations, disbursement on the basis of the assumptions made by the Bank: 0% in the year when the financing contracts are 
signed, then 10% in the second year, then 25% per year from the third to the fifth year, and 15% in the sixth vear. 
(b) Decisions already adopted by the Council: 
Decision of 14 April 1997 granting a Community guarantee to the EIB (OJ L 102. p. 33. 19.4.1997) for an amount of ECU 7,105 million over three years 
beginning on 31 January 1997; 
Commission proposal for a decision guaranteeing a loan of ECU 150 million to FYROM (COSU98) 2 of 13 January 1998) pursuant to Decision 97/831/EC of 
27 November 1997 concerning the conclusion of a cooperation agreement between the EC and the former Yugoslav Republic of Macedonia. Duration of 
loan: three years, 1998-2000. 
(c) Assumptions made for the new decisions planned: 
* in the case of EIB loans over the period 2000-2006, renewal on the same three-year envelop of the overall allocations approved by the Council for 1997-99. i.e. 
ECU 7,255 million distributed in equal parts over three years; 
* in the case of Euratom loans and micro-financial assistance, ECU 200 million and ECU 400 million per year respectively over the period 1998-2006. These amounts 
were determined by reference to the overall limits approved in the Council conclusions of 27 January 1997. 
(d) The gross amount of the Fund is obtained as follows: Fund t = Fund t-1 + (resources t - costs t) - surplus t-1 in relation to the target amount. 
(e) The cumulative gross amount of the Fund is obtained as follows: Fund t = Fund t-1 •+- (resources t - costs t). 
Other assumptions for the calculation of the Fund: * Disbursements from the Fund are maintained at their level of 31 December 1997, i.e. ECU 315 million 
over the period 1998-2006; 
* Investment of Fund resources at an interest rate of 5% over the period. 
-22-
Financial data on the performance of the Guarantee Fund 
over the period 1994-1997 ANNEX 2 
Utilisation of the reserve from 1994 to 1997 
(ECU million) 
1. Reserve 
2. Authorised withdrawals from the 
reserve 
3. Rate of utilisation (2/1) 
4. Margin remaining in the reserve 
(1-2) 
5. New operations guaranteed 
6. Unused lending capacity (*) 1994 
318.00 
293.72 
92.4% 
24.28 
2,098.00 
161.87 1995 
323.00 
250.75 
77.6% 
72.25 
1,762.50 
481.67 1996 
326.00 
235.39 
72.2% 
90.61 
1,651.00 
604.07 1997 
329.00 
286.09 
86.9% 
42.91 
1,893.50 
2,86.07 1994-1997 
1,296.00 
1,065.95 
82.2% 
230.05 
7,405.00 
1,533.67 
(*) Calculated on the basis of the margin remaining in the reserve at a provisioning rate of 15%. 
Source: Commission services 
FUND LIABILITIES AND COVERAGE OF RISKS 
OVER THE PERIOD 1994-1997 
(ECU million) 
Resources 
1. Provisioning 
2.Interest 
3. Disbursements 
on guarantees 
4. Other costs 
5. Late 
reimbursements 
6. Amount of the 
Fund 
7. Liabilities 
8.Target amount = 
7*10% 
9.Ratio = 6./7. Situation at 
31.12.94 
293.72 
0.47 
0.00 
0.00 
0.00 
294.19 
7,598.30 
759.83 
3.87 % Change in 
resources 
in 1995 
+ 250.75 
i 23.53 
- 303.07 
-0.19 
+- 35.63 
+ 6.65 Situation 
at 31.12.95 
544.47 
24.00 
303.07 
0.19 
35.63 
300.84 
7,751.91 
775.19 
3.88 % Change in 
resources 
in 1996 
+235.39 
I 19.84 
-52.54 
-1.85 
+ 55.72 
+256.56 Situation 
at 
31.12.96 
779.86 
43.84 
355.61 
2.04 
91.35 
557.40 
8,341.22 
834.12 
6.68% Change in 
resources 
in 1997 
+286.10 
+34.51 
-54.29 
-6.96 
+45.03 
+304.39 Situation 
at 
31.12.97 
1,065.96 
78.35 
409.90 
9.00 
136.38 
861.79 
7,961.00 
796.10 
10.82% 
/. Provisioning payments from the budget 
2. Interest - interest on Fund availabilities invested 
3. Disbursements on guarantees =-• amounts disbursed by the Fund 
4. Other costs = El B fees and other financial costs 
5. Late reimbursements arrears of payment accruing to the Fund, including penalty interest paid 
by debtors 
9. Ratio = percentage to which risks are covered 
Source: Commission services 
PROPOSAL FOR A COUNCIL REGULATION (EC, EURATOM) No of 
Amending Council Regulation (EC, Euratom) No 2728/94 
Establishing a Guarantee Fund for external actions 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing the European Community, and in particular 
Article 235 thereof, 
Having regard to the Treaty establishing the European Atomic Energy Community, and in 
particular Article 203 thereof, 
Having regard to the proposal from the Commission, 
Having regard to the opinion of the European Parliament, 
Having regard to the opinion of the Court of Auditors, 
Whereas the Guarantee Fund is endowed by payments from the general budget of the 
European Communities, by the interest on its invested resources and by the amounts 
recovered from defaulting debtors where the Fund has already honoured the guarantee; 
Whereas experience of the functioning of the Guarantee Fund indicates that a ratio of 8% 
between the Fund's resources and guaranteed liabilities in principal, increased by unpaid 
interest due, would be adequate; 
Whereas payments to the Guarantee Fund equal to 6% of the amount of each operation 
would seem sufficient to attain the target amount; 
Whereas the Guarantee Fund attained its target amount on 31 December 1997 and the 
provisioning rate should be reviewed; 
Whereas if the Guarantee Fund exceeds the target amount the surplus is paid back to the 
general budget of the European Communities; 
Whereas experience has shown that the various Commission departments are closely 
involved in the functioning of the Guarantee Fund; 
Whereas, in these circumstances, the financial management of the Guarantee Fund should 
be entrusted to the Commission; whereas the financial management of the Fund is subject 
to audit by the Court of Auditors; 
Whereas the Treaties do not provide any powers other than those pursuant to Article 235 
of the EC Treaty and Article 203 of the Euratom Treaty for the adoption of this 
Regulation, 
HAS ADOPTED THIS REGULATION: 
Article 1 
Regulation (EC, Euratom) No 2728/94 is hereby amended as follows: 
1. In Article 3 the second paragraph is replaced by the following: 
"The target amount shall be 8% of the Community's total outstanding capital 
liabilities arising from each operation, increased by unpaid interest due." 
2. Article 4(1) is replaced by the following: 
"The payments provided for under the first indent of Article 2 shall be equivalent 
to 6% of the capital value of the operations." 
3. In Article 5 the first paragraph is replaced by the following: 
"If, as a result of the activation of guarantees following default, resources in the 
Fund stand below 75% of the target amount, the rate of provisioning on new 
operations shall be raised to 7% until the target amount has once more been 
reached." 
4. Article 6 is replaced by the following: 
"The financial management of the Fund shall be entrusted to the Commission." 
5. Article 9 is replaced by the following: 
"The Commission shall, before 31 December 2006, submit a comprehensive 
report on the functioning of the Fund." 
Article 2 
This Regulation shall enter into force on 1 January 1999. 
This Regulation shall be binding in its entirety and directly applicable in all Member 
States. 
Done at , 
For the Council 
The President 
ai 
ISSN 0254-1475 
COM(98) 168 final 
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