Comprehensive report on the functioning of the guarantee fund
Date: 1998-03-18
Institutions: European Commission
Subjects: Community loan, credit guarantee, financial management, fund (EU), third country

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 

2. 

THE FUNCTIONING OF THE GUARANTEE FUND 

5 

6 

2.1.  THE AIMS OF THE GUARANTEE FUND MECHANISM 
2.2.  PERFORMANCE OF THE GUARANTEE FUND OVER THE PERIOD 1994-97 

6 
6 
2.2.1.  Protection given by the Fund against unforeseen demands on budget appropriations in the 
5 
event of default 
8 
2.2.2.  Budgetary discipline 
9 

2.3.  CONCLUSIONS  ON THE FUNCTIONING OF THE GUARANTEE FUND 

3. 

THE GUARANTEE FUND IN THE FINANCIAL PERSPECTIVE 2000-2006 THE 
COMMISSION'S PROPOSALS FOR REFORM 

3 . 1.  THE  TARGET AMOUNT 
3.2.  THE  PROVISIONING  RATE 

3.3.  THE  LEVEL OF THE RESERVE AND THE FUND'S CAPACITY  FOR GUARANTEED LENDING 
3.4.  REVIEW OF THE PERFORMANCE OF THE FUND 
3.5. 
3.6. 

TRANSFER OF THE FUND'S  FINANCIAL  MANAGEMENT TO THE COMMISSION 
IMPLICATIONS OF THE PROPOSALS FOR THE FUND'S  REGULATION 

10 

10 
\\ 

13 
16 
16 
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 
the 
implementation  of the  budget. 

totalling  ECU  410 million,  which  would  have  disrupted 

-  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 
i.e. 
Community's  outstanding 
ECU  862  million. 

guaranteed 

liabilities 

arising 

loans, 

from 

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. 

the  end  of  the  period  covered  by  the  next  financial  perspective, 

Before 
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. 

-5 

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 
is  to  submit,  before  31 December  1998,  a  comprehensive  report  on  the 
Commission 
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. 

Chart 1 

Cover  of  defaults  by  Fund  resources 

(ECU  million,  at  half-yearly intervals) 

456,19 

474,6 

557,4 

537,9 

294,2 

300,8 

228,9 

74,16 

42,8 

9,75 

48,2 

1 

6,1 

1/95 

2/95 

1/96 

2/96 

1/97 

2/97 

D  Calls  on  Fund  D  Fund  resources 

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 

Mar 
1995 

Jun 
1995 

Sep 
1995 

Dec 
1995 

Mar 
1996 

Jun 
1996 

Sep 
1996 

Dec 
1996 

Mar 
1997 

Jun 
1997 

Sep 
1997 

Dec 
1997 

i  1.  Disbursements 

33 

39 

43 

267 

273 

293 

2 8! 

264 

290 

295 

295 

291 

2.  Liabilities'*> 

6,01 9 

5,724 

5,811 

6,231 

5,934 

6,116 

6,351 

6,696 

7,103 

7,581 

7.918 

7,961 

3  =  1 as  %  of  2 

0.55 

0.69 

0.75 

4.29 

4.59 

-jSt ii 

4.42 

3.95 

4.08 

3.89 

3.73 

3.65 

(*)  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. 

he  Regu 
kdisbursei 

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 
increased  by 
ECU  7,405  million  (disbursements  for  these  operations  are  spread  over  several 
the  amounts  reimbursed  on  earlier 
years).  Over  the  same  period,  however, 
guarantees  have  amounted  to ECU  3,100  million. 

the  Council  has 

approved  by 

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 
Community  guarantee  are  consistent  with  a  provision  of  ECU  1,050  million  for 
assistance  (MFA)  assuming 
MF A  will  be  increased  to  ECU  1,200  million  if  Euratom  lending  in  the  period  of  consideration 
not  exceed  ECU  600  million.  " 

that  ECU  750  million  is  needed  for  Euratom  lending.  The  maximum 

covered  by  a 
macro-financial 
for 
does 

to  the  Council's  conclusions  of  2 December  1996,  the  provisioning  rates  for 

According 
the 
Guarantee  Fund  were  to  remain  at  their  present  levels  until  1999.  According  to  the  Council's 
conclusions  of  27  January  1997,  "each  payment 
fund  will  be  based  on  the 
percentage  required  at  the  time  of payment,  that  is  15%  currently  and  14%  as  soon  as 

to  the  loan  guarantee 

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. 

10 

3. 

T HE  G U A R A N T EE 

FUND 

IN  THE 

FINANCIAL 

PERSPECTIVE  2000-2006. 

T HE  COMMISSION'S  PROPOSALS  FOR  REFORM 

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) 

Financial Perspective 1993-1999 

Financial f erspecflye 2000||(| 

1992 

1997 

Forecast 1999 

1992 prices 

1997 prices 

1999 prices 

(1)  Reserve for guarantees 

300  (a) 

329  (b) 

346  (b) 

(2)  Provisioning rate 

14%  (c) 

14% 

(3) Annual effective capacity 
at 100%  guarantee [(3) = (1)/(2)] 

2,140 

2,350 

14% 

2,471 

,;j; ;:;:a|'9|i;|irk^s 
:'- : m 

^l; 

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 

is  proposed 

to  be  8%  of 
The  target  amount  over  the  next  Financial  Perspective 
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 
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 
the 
Guarantee  Fund. 

liabilities),  it  is  proposed 

to  replenish 

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 
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 

the  period  1994-1997,  cumulative 

interest 

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) 

A  Gross amount at 14% 

12  f 

10 

Gross amount at 6% 

Gross cumulative amount at 6% 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

Gross amount at  14%: 

Gross cumulative amount at 6%: 
Gross amount at 6%: 

Fund  resources  in  year  t  prior  to  reimbursement  to  the  budget  in  year  t+1 ; 
provisioning rate  14% ; 
Fund resources without reimbursement to the budget ; provisioning rate 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 
target 
amount. 

the  Fund  with  resources  which  are  consistent  with  the 

to  endow 

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%"); 

- 1 3-

- 

- 

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 
that 
the  horizon 
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. 

to  2006,  simulations  show 

in  repayments.  Over 

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. 

- 1 4-

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) 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

Average 
2000-2006 

Annual  value  of the  Reserve  (a) 

150 

153 

756 

159 

762 

766 

769 

759 

Annual  capacity  (a) 

2,500 

2,550 

2,600 

2,650 

2,700 

2,767 

2,820 

2,655 

Projected  increase  in guaranteed  loans  (b) 

2,293 

2,293 

2,293 

2,293 

2,293 

2.293 

2,293 

2,293 

Annual  utilization  of  the  Reserve  (c) 

0.92 

0.90 

0.88 

0.87 

0.85 

0.83 

0.81 

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 

it  is  assumed  that  it  will  be  necessary  to  support 
For  the  new  Financial  Perspective, 
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 
the  period  2000-2006  at  100% 
Ecu  2,500  million 
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. 

(1999  prices)  annually  over 

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 

- 1 5-

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. 

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. 

10 

Agreement  between  the  European  Community  and  the  European  Investment  Bank  concerning  the 
management  of the Guarantee Fund, signed on 23 and 25 November  1994. 

- 1 7-

-  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 

Credits 
- Transfers from Reserve 
- Interest  income 
- Late  reimbursements 

Total resources 

Debits 
- Defaults 
- EIB commissions 
- Surplus transferred to EU budget 

Source: Commission  services 

Provisioning rate:  14% 

Stocks 

Flows 

1,065.96 
78.36 
136.38 

1,280.70 

409.90 
0.71 

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 

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-

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) 

Simulations showing the evolution of the Guarantee Fund over the period 1998-2006, on the basis of three scenarios: 

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% 

over the period 1999-2006. Repayment to the budget of the Fund's surplus over the target amount 

ANNEX  1 

(scenario C) 

Guarantee liabilities on the basis of:  (a) 

Situation at 

Estimate for 

Estimate for 

Estimate for 

Estimate for 

Estimate for 

Estimate for 

Estimate for 

Estimate for 

Estimate for 

31.12.97 

31.12.98 

31.12.99 

31.12.2000 

31.12.2001 

31.12.2002 

31.12.2003 

31.12.2004 

31.12.2005 

31.12.2006 

ECU million 

1. decisions already adopted by the Council (b) 

7,961.00 

9,483.00 

11,207.00 

13,404.00 

15,671.00 

15,901.00 

15,641.00 

14,648.00 

12,991.00 

11,445.00 

2. new decisions planned (c) 

3. Total liabilities (3 = 1.+ 2.) 

Scenario A 

205.00 

637.00 

1,119.00 

2,089.00 

3,543.00 

5,650.00 

8,315.00 

11,191.00 

13,853.00 

7,961.00 

9,688.00 

11,844.00 

14,523.00 

17,760.00 

19,444.00 

21,291.00 

22,963.00 

24,182.00 

25,298.00 

4. Gross amount of the Fund (d) 

861,79 

1,140.81 

1,338.10 

1,613.74 

1,853.14 

2,188.79 

2,373.71 

2,567.56 

2,744.46 

2,875.01 

5. Gross amount of the Fund  as % of 3. 

10.83 

11.78 

11.30 

11.11 

10.43 

11.26 

11.15 

11.18 

11.35 

6. Target amount at 10% (3.*10%) 

796.10 

968.80 

1,184.40 

1,452.30 

1,776.00 

1,944.40 

2,129.10 

2,296.30 

2,418.20 

7. Surpluses repaid to the budget in n+1 (4.-6.) 

65.69 

172.01 

153.70 

161.44 

77.14 

244.39 

244.61 

271.26 

326.26 

11.36 

2,529.80 

345.21 

Scenario B 

8. Cumulative gross amount of the Fund 

(e) 

861.79 

1,206.50 

1,400.29 

1,625.22 

1,843.23 

2,072.06 

2,312.19 

2,564.20 

2,828.72 

3,106.30 

9. Cumulative gross amount of the Fund  as % of 3. 

10.83 

12.45 

11.82 

11.19 

10.38 

10.66 

10.86 

11.17 

11.70 

12.28 

Scenario C 

10. Gross amount of the Fund  (d) 

861,79 

1,140.81 

1,159.34 

1,160.52 

1,355.53 

1,560.22 

1,770.31 

1,928.47 

2,070.10 

2,174.59 

11. Gross amount of the Fund  as % of 3. 

10.83 

11.78 

9.79 

7.99 

7.63 

8.02 

8.31 

8.40 

8.56 

8.60 

12.  Target amount at 10% for 1998 (3.*10%) 

13. Target amount at 8% over 1999-2006 (3.*8%) 

14. Surpluses repaid to the budget in n+1 (10.-12.) 

Source:  Commission services 

796.1 

65.69 

968.8 

172.01 

947.52 

1,161.84 

1,420.8 

1,555.52 

1,703.28 

1,837.04 

1,934.56 

211.82 

0.00 

0.00 

4.70 

67.03 

91.43 

135.54 

2,023.84 

150.75 

-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) 

(e) 

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. 

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. 

- 2 2-

ANNEX  2 

Financial  data  on the performance  of the  Guarantee  Fund 
over  the  period  1994-1997 

Utilisation  of the reserve from  1994 to 1997 
(ECU  million) 

1994 

1995 

1996 

1997 

1994-1997 

1. Reserve 

318.00 

323.00 

326.00 

329.00 

1,296.00 

2. Authorised  withdrawals 

from 

the 

293.72 

250.75 

235.39 

286.09 

1,065.95 

reserve 

3. Rate  of  utilisation  (2/1) 

92.4% 

77.6% 

72.2% 

86.9% 

82.2% 

4. Margin 
(1-2) 

remaining 

in 

the 

reserve 

24.28 

72.25 

90.61 

42.91 

230.05 

5. New operations  guaranteed 

2,098.00 

1,762.50 

1,651.00 

1,893.50 

7,405.00 

6. Unused  lending  capacity  (*) 

161.87 

481.67 

604.07 

2,86.07 

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 

Situation at 
31.12.94 

Change in 
resources 
in  1995 

Situation 
at 31.12.95 

Change in 
resources 
in  1996 

Situation 
at 
31.12.96 

Change in 
resources 
in  1997 

Situation 
at 
31.12.97 

1. Provisioning 

293.72 

+ 250.75 

544.47 

+235.39 

779.86 

+286.10 

1,065.96 

2.Interest 

0.47 

i 23.53 

24.00 

I  19.84 

43.84 

+34.51 

78.35 

3. Disbursements 
on  guarantees 

0.00 

- 303.07 

303.07 

-52.54 

355.61 

-54.29 

409.90 

4. Other  costs 

0.00 

-0.19 

0.19 

-1.85 

2.04 

-6.96 

9.00 

5. Late 

reimbursements 

6. Amount  of  the 

Fund 

0.00 

+-  35.63 

35.63 

+ 55.72 

91.35 

+45.03 

136.38 

294.19 

+ 6.65 

300.84 

+256.56 

557.40 

+304.39 

861.79 

7. Liabilities 

7,598.30 

7,751.91 

8,341.22 

8.Target  amount  = 

7*10% 

759.83 

9.Ratio  = 6./7. 

3.87 % 

775.19 

3.88 % 

834.12 

6.68% 

7,961.00 

796.10 

10.82% 

payments  from  the  budget 

/.  Provisioning 
2.  Interest  -  interest  on Fund  availabilities 
3.  Disbursements  on guarantees  =-•  amounts  disbursed  by the  Fund 
4.  Other  costs  =  El B fees  and other financial  costs 
5.  Late  reimbursements 
by  debtors 
9. Ratio  = percentage  to which  risks  are  covered 

invested 

arrears  of payment  accruing  to the  Fund,  including  penalty  interest  paid 

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." 

This Regulation shall enter into force on 1  January 1999. 

Article 2 

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 

DOCUMENTS 

EN 

01  09  03  17 

Catalogue  number  :  CB-CO-98-188-EN-C 

ISBN  92-78-32455-8 

Office  for Official  Publications of the European  Communities 

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