Commission Report - Annual Report from the Commission on the Guarantee Fund and its Management in 2002
Date: 2003-07-09
Institutions: European Commission
Subjects: activity report, balance sheet, budgetary reserve (EU), credit guarantee, financial management, financial year

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 9.7.2003
COM(2003) 405 final

COMMISSION REPORT

Annual Report from the Commission on the Guarantee Fund and its Management in
2002

CONTENTS

1.

2.

3.

3.1.

3.2.

3.3.

4.

4.1.

4.2.

Legal bases ................................................................................................................... 4

Position of the fund at 31 December 2002................................................................... 4

Payments into the Fund................................................................................................ 5

Payments from the general budget in the course of the financial year ........................ 5

Interest from financial investment of the Fund's liquid assets ..................................... 6

Recovery from defaulting debtors................................................................................ 7

The Fund's liabilities .................................................................................................... 7

Default payments ......................................................................................................... 7

EIB remuneration......................................................................................................... 7

ANNEX I.................................................................................................................................... 8

Legal bases for payments to the Guarantee Fund from the general budget ............................... 8

1.

2.

Decisions covered by Transfer 13/2002....................................................................... 8

Decisions covered by Transfer 54/2002....................................................................... 9

ANNEX II ................................................................................................................................ 10

Guarantee Fund - Management Report at 31 December 2002................................................. 10

1.

2.

2.1

2.2

3.

3.1

3.2

3.3

Development of the Fund in 2002.............................................................................. 10

Situation of the Fund.................................................................................................. 11

The Fund's resources at 31 December 2002............................................................... 11

The Fund's assets at 31 December 2002 .................................................................... 11

General and segmental analysis of the Guarantee Fund. ........................................... 11

Liquidity analysis ....................................................................................................... 11

General analysis of the results of the Fund ................................................................ 12

Analysis by segment .................................................................................................. 12

3.3.1

Performance analysis of treasury operations ............................................................. 12

3.3.2

Analysis of bond portfolio results .............................................................................. 14

ANNEX III.1 ............................................................................................................................ 19

Situation of the Guarantee Fund AT 31.12.2002 ..................................................................... 19

ANNEX III.2 ............................................................................................................................ 20

Performance of the Guarantee Fund's bond investment portfolio............................................ 20

2

ANNEX III.3 ............................................................................................................................ 21

Consolidated financial balance sheet of the Guarantee Fund at 31 December 2002 ............... 21

3

1.

LEGAL BASES

Council  Regulation  (EC,  Euratom)  No  2728/94  of  31  October  1994  (“the
Regulation”)  set  up  a  Guarantee  Fund  for  external  operations  in  order  to  repay  the
Community's  creditors  in  the  event  of  default  by  beneficiaries  of  loans  granted  or
guaranteed by the Community (OJ L293, 12.11.1994, pp. 1-4).

In accordance with Article 6 of the Regulation, the Commission entrusted financial
management  of  the  Fund  to  the  European  Investment  Bank  (EIB)  under  an
Agreement  signed  between  the  Community  and  the  EIB  on  23  November  1994  in
Brussels and on 25 November 1994 in Luxembourg (“the Agreement”).

Under Article 8(2) of the Agreement, by 1 March each year the Bank must send the
Commission  a  status  report  on  the  Fund  and  its  management,  the  revenue  and
expenditure account and the financial statement for the Fund for the preceding year.
An extract from the report covering 2001 is in Annex II.

In  addition,  Article  7  of  the  Regulation  establishing  the  Fund  requires  the
Commission to send the European Parliament, the Council and the Court of Auditors
a report on the situation of the Fund and its management for each financial year by
31 March of the following year.

2.

POSITION OF THE FUND AT 31 DECEMBER 2002

At  the  close  of  the  2002  financial  year,  the  Fund  totalled  € 1 646 291 687.98
(Annex III.1). This is the sum, since the Fund was established, of all:

– 

– 

– 

– 

– 

budget payments to the Fund (€ 2 198 599 500.00);

successive  yearly  net  results  (€ 456 474 871.71)  and  interest  received  on  late
recoveries;

late repayments from non-member countries (€ 568 217 579.44);

debts corresponding to the repayments not made to the EIB (€ 737 316.27);

less:  calls  on  the  Fund's  resources  (€ 468 662 140.15)  and  successive
repayments to the budget of the surplus in the Fund (€ 1 009 520 000.00).

After the EIB's remuneration is deducted, the Fund total at 31 December 2002 comes
to € 1 645 554 371.71.

total  amount  of 

III.3) 
is
The 
€ 1 646 291 687.98,  which  breaks  down 
in  deposits,
€ 1 863 221.88 on current account and € 1 311 255 202.45 in the securities portfolio.

the  consolidated  balance  sheet 

into  € 299 500 000.00 

(Annex 

Article  3  of  the  Regulation  establishing  the  Fund  requires  that  the  amount  of  the
Fund  has  to  reach  an  appropriate  level  (target  amount)  set  at  9%  of  the  total
outstanding capital liabilities arising from each operation, plus unpaid interest due.

4

Outstanding  lending  and  loan  guarantee  operations  for  non-member  countries  plus
totalled  € 15 357 955 465.62  at  31.12.2002,  of  which
unpaid 
€ 142 811 943.97 was accounted for by interest due but not yet paid.

interest  due 

The ratio between the Fund's resources and outstanding capital liabilities within the
meaning of Regulation No 2728/94 was 10.71%. Since this is higher than the target
amount of 9%, there had to be a repayment from the Fund to the general budget of
the  Communities,  as  provided  for  in  the  third  paragraph  of  Article  3  of  the
Regulation. The amount to be repaid to the budget came to € 263 330 000.00.

The  following  sections  describe  developments  affecting  the  Fund's  resources  and
liabilities in 2002.

3.

PAYMENTS INTO THE FUND

3.1.

Payments from the general budget in the course of the financial year

Article  1  of  Regulation  No  1149/99  of  25  May  1999  amending  Regulation  No
2728/94 establishing the Fund stipulates that the Fund is to be endowed by payments
from  the  general  budget  equivalent  to  9%  of  the  capital  value  of  loan  and  loan
guarantee operations until the target amount is reached. This Article also lays down
that  the  provisioning  rate  is  to  be  raised  to  10%  for  new  operations  if  the  Fund's
resources  fall  below  75%  of  the  target  amount  as  a  result  of  guarantees  being
activated to cover any default (OJ L139, 2.6.1999, pp. 1-2).

The legal bases for the provisioning arrangements are described in Annex I.

The  Council  Decision  of  31  October  1994  (94/729/EC)  concerning  budgetary
discipline  authorised  the  entry  in  the  general  budget  of  a  reserve  for  loan  and  loan
guarantee operations. This item, which was allocated provisions of € 213 million in
2002, is used for endowing the Fund by transferring amounts into the budget item for
payments into the Fund (OJ L293, 12.11.1994, pp. 14-18).

On these legal bases, two transfers totalling € 170 490 000 to  endow the Guarantee
Fund were adopted by the budgetary authority in 2002.

– 

– 

Transfer 13/2002: € 166 720 000. This first transfer at the beginning of the year
was  for  payments  into  the  Fund  in  respect  of  the  Council  Decisions  of
24 January 1994, 19 May 1998, 22 April, 29 November and 22 December 1999
and  6  November  2001  in  accordance  with  the  arrangements  set  out  in  the
Annex to the Regulation establishing the Fund.

Transfer 54/2002: € 3 770 000. This second transfer was for payments into the
Fund  in  respect  of  loan  operations  adopted  by  the  Council  on  12 July  and
5 November 2002. The decisions covered by this transfer are given in Annex I.

The  first  annual  transfer  was  effected  on  1 July  2002  under  the  mechanism  for
offsetting  against  the  repayment  of  the  Fund’s  surplus,  and  the  second  was  the
subject of an actual payment dated 8 January 2003.

5

3.2.

Interest from financial investment of the Fund's liquid assets

The Fund's liquid assets are invested in accordance with the management principles
laid  down  in  the  Annex  to  the  Community/EIB  Agreement  of  25 November  1994,
amended  by  Supplementary  Agreement  N°  1  of  17/23  September  1996  and
Supplementary Agreement N° 2 of 26 April/8 May 2002 .

By Supplementary Agreement N° 2, the investment principles were changed in order
to correct the excess liquidity which had risen to over 50% of the Fund's assets and
was restricting the yield of the Fund. While retaining the limit whereby at least one
third  of  the  Fund  must  be  invested  in  short-term  investments  (up  to  one  year),  the
instruments  eligible  for  short-term  liquidity  were  extended.  They  now  include
variable-rate securities, irrespective of their maturity dates,  and fixed-rate securities
with  a  maximum  of  one  year  remaining  to  maturity,  irrespective  of  their  initial
maturity  period.  This  is  because  fixed-rate  securities  are  reimbursable  at  100%  of
their nominal value at the end of their life (i.e. after a maximum of one year), while
variable-rate  securities  can  be  sold  at  any  time  at  a  price  approaching  100%,
whatever  their  remaining  period  to  maturity.  To  maintain  a  balance  between  the
various  instruments  for  which  liquidity  is  monitored,  a  minimum  of  18%
(corresponding  to  double  the  provisioning  rate  of  the  Fund)  is  kept  in  monetary
investments, particularly bank deposits. This new structure is intended to improve the
Fund's yield while maintaining a prudent liquidity level.

As a result of the reduction in excess liquidity, 2002 saw the gradual introduction of
the strategy to increase the proportion of the portfolio invested in fixed-rate securities
while extending the maturity period from the 2.5 years it had been in previous years
to 4.2 years in 2002. This has considerably increased the overall yield of the Fund.

The list of banks authorised to receive deposits is agreed by the Commission and the
EIB. The original list has been regularly revised in the light of the latest changes in
bank ratings. Most of the  banks are  members  of the euro clearing system.  They  all
have a Moody's rating of at least A1 for long-term and P1 for short-term investments,
or an equivalent Standard & Poors or Fitch rating. The investments made with them
are governed by rules to ensure a good spread and avoid the concentration of risk.

In  2002,  interest  on  deposits,  the  Guarantee  Fund  current  account  and  securities
totalled € 75 437 331.41, broken down as follows:

– 

– 

– 

deposits:  € 12 898 616.22.  This  represents  the  situation  at  31  December  2002
including interest received on bank deposits (€ 14 229 202.09) and changes in
accrued interest (-€ 1 330 585.87) in 2002. The accrued interest corresponds to
interest which has not been received by the Fund at the end of the year but will
be paid at the dates fixed for maturity of the investments. The interest accrued
at  31  December  2002  (€ 1 389 568.47)  is  reduced  by  the  accrued  interest
entered in the accounts for 2001 but received in 2002 (€ 2 720 154.34).

current  accounts:  € 175 770.26  comprising  interest  recorded  on  the  current
account.

securities portfolio: € 61 001 453.32. The interest on securities is generated by
investments placed in the form of securities in accordance with the investment
principles laid down in the Agreement giving the EIB the task of managing the

6

Fund's  liquid  assets.  From  this  figure  must,  however,  be  subtracted  the
€ 2 712 785.37 entered in the course of the year as the difference between the
entry  price  and  the  redemption  value  divided  pro  rata  temporis  over  the
remaining  life  of  the  securities  held  (corresponding  to  the  spread  of  the
premium or discount entered in the profit-and-loss account).

The interest received is entered in the results for the financial year.

3.3.

Recovery from defaulting debtors

Since  the  Fund's  guarantee  was  not  called  in  during  2002,  and  in  any  case  its
resources are not mobilised to guarantee unpaid debts (since all debts were recovered
in 2001), the running total of € 568 217 579.44 is the same as at 31 December 2001.

4.

THE FUND'S LIABILITIES

4.1.

Default payments

The Fund's guarantee was not called in during 2002.

4.2.

EIB remuneration

Article  6  of  the  management  agreement  sets  an  annual  commission  of  0.125%
calculated on the Fund's average monthly  balances. The  figure is  to  be reviewed  at
the end of any year in which the Fund's liquid assets reach ECU 300 million and no
later  than  three  years  following  the  date  of  the  first  payment  into  the  Fund,  taking
into account such things as the growth of the Fund's activities.

As  the  Fund  had  reached  ECU  300  million  at  the  end  of  1995,  the  EIB's
remuneration was reviewed. A supplementary agreement dated 17 September and 23
September  1996  to  the  Agreement  reduced  the  annual  payment  to  0.05%  of  the
Fund's assets; this rate was applied retrospectively to 31 December 1994.

A second Supplementary Agreement, signed on 26 April and 8 May 2002, lays down
that the Bank's remuneration is to be determined by applying to each of the tranches
of the Fund's assets the degressive annual rates of commission which relate to them
respectively. This remuneration is calculated on the basis of the average assets of the
Fund.

Applicable  retroactively  to  1 January  2001,  the  Bank's  remuneration  for  2002  was
fixed at € 737 316.27 and was entered in the profit-and-loss account and as accruals
(liabilities) on the balance sheet. This payment will be made to the EIB  in  the  first
half of 2003.

7

ANNEX I

LEGAL BASES FOR PAYMENTS TO THE GUARANTEE FUND FROM THE GENERAL BUDGET

The Annex to Regulation No 2728/94, which concerns the arrangements for payments under
the  Guarantee  Fund,  stipulates  that,  for  borrowing/lending  operations  or  guarantees  to
financial  bodies  under  a  framework  facility  spread  over  several  years  and  with  a  micro-
economic and structural purpose, payments will be made in annual tranches calculated on the
basis of the annual amounts indicated in the financial statement attached to the Commission
proposal, adapted, where appropriate, in the light of the Council decision.

In  the  case  of  other  borrowing/lending  operations  such  as  balance-of-payments  loans  to
non-member  countries,  irrespective  of  whether  they  are  made  in  one  or  more  than  one
tranche,  the  amount  to  be  paid  into  the  Fund  will  be  calculated  on  the  basis  of  the  total
amount for the operation decided by the Council.

Two transfers were made from the guarantee reserve under this procedure in 2002:

1.

DECISIONS COVERED BY TRANSFER 13/2002

– 

– 

– 

– 

EIB  -  Mediterranean  Protocols:  under  the  financial  cooperation  with  all  the
Mediterranean  countries, the loans  granted by the  EIB  in  the  countries  of  the
Mediterranean basin are covered by a global guarantee equal to 75% of all the
credits opened as part of the lending operations in the countries concerned.

EIB  -  Baltic  Regions  of  Russia:  Council  Decision  of  6  November  2001
(2001/777/EC)  granting  a  Community  guarantee  to  the  European  Investment
Bank against losses under a special  lending action for selected environmental
projects in the Baltic Sea basin of Russia under the Northern Dimension. The
aid,  in  the form of EIB loans,  totals € 100 million  (OJ L  292 of  9  November
2001, pp. 41-42).

Council  Decision of 22 December 1999  (2000/24/EC)  granting  a  Community
guarantee  to  the  European  Investment  Bank  against  losses  under  loans  for
projects  carried  out  outside  the  Community  (Central  and  Eastern  Europe,
Mediterranean  countries,  Latin  America  and  Asia,  Republic  of  South  Africa)
subject  to  an  overall  loan  ceiling  of  € 18 410  million  granted  for  a  period  of
seven years beginning on 1 February 2000 for Central and Eastern Europe, the
Mediterranean  countries,  Latin  America  and  Asia  and  on  1 July  2000  for  the
Republic of South Africa and ending on 31 January 2007 for all the regions (OJ
L9, 13.1.2000, pp. 24-26).

Council Decision of 29 November 1999 (1999/786/EC) granting a Community
guarantee  to  the  European  Investment  Bank  against  losses  under  loans  for
projects for the reconstruction of the earthquake-stricken areas of Turkey. The
loans  are  subject  to  an  overall  ceiling  of  € 600  million  to  be  granted  for  a
period of three years (OJ L308, 3.12.1999, pp. 35-37).

8

– 

Council  Decision  of  22  April  1999  (1999/282/EC)  providing  macro-financial
assistance of € 20 million to Albania. The loan assistance which has not been
the  subject  of  any  signed  loan  agreement  and  will  not  be  usable  under  this
Decision totals € 20 million (OJ L110, 28.4.1999, pp. 13-15).

2.

DECISIONS COVERED BY TRANSFER 54/2002

– 

– 

– 

Council Decision  of  12  July  2002  (2002/639/EC)  repealing  Council  Decision
98/592/EC  and  providing  further  macro-financial  assistance  for  Ukraine.  The
aid, in the form of a loan, totals € 110 million (OJ L209, 6.8.2002, pp. 22-23).

Council  Decision  of  5  November  2002  (2002/882/EC)  providing  further
macro-financial assistance  to the Federal  Republic of  Yugoslavia.  The  aid, in
the form of a loan, totals € 55 million (OJ L 308, 9.11.2002, ppo.25-27).

Council  Decision  of  5  November  2002  (2002/883/EC)  providing  further
macro-financial assistance to Bosnia and Herzegovina. The aid, in the form of
a loan, totals € 20 million (OJ L308, 9.11.2002, pp.28-29).

9

ANNEX II

GUARANTEE FUND - MANAGEMENT REPORT AT 31 DECEMBER 2002

1.

1.1.

DEVELOPMENT OF THE FUND IN 2002

As  stated  in  point  2.2,  the  total  holdings  of  the  Fund  stood  at  € 1 612.6 million  at
31 December 2002 as against € 1 744.7 million at 31 December 2001, a decrease of
€ 132.1 million.

( in € million )

2000

1900

1800

1700

1600

1500

1400

1300

1200

1100

1000

2002

2001

 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Fig.1: Development of holdings in 2002

1.2.

In 2002 two main events influenced the Fund's holdings:

On  23  October  2001  the  Fund  recorded  the  payment  of  the  arrears  of  the  Federal
Republic  of  Yugoslavia  debt  together  with  the  corresponding  commissions.  On
29 May 2002, € 5.1 million was received from the EIB as a partial repayment of its
own  commission,  in  accordance  with  the  letter  of  13 May  2002  from  Mr  Klaus
Regling to President Maystadt.

The Fund had a surplus of € 372.4 million at 31 December 2001, and an allocation of
€ 166.7 million  was  entered  on  1 July  2002  by  paying  the  Commission  the
difference,  i.e.  € 205.7 million.  Total  provisioning  for  2002  was  € 171.8 million
(€ 166.7 million + € 5.1 million).

1.3.

Income in each segment was proportional to the breakdown of assets allocated to the
bond and money-market segments, as agreed between the EIB and the Commission.
The  net  operating  result  thus  amounted  to  € 71.8  million  at  31  December  2002,
compared  with  € 69.6  million  at  31  December  2001.  Bond  portfolio  income
(appreciation  on  sales  and  net  of  the  premium/discount  spread)  amounted  to
€ 59.7 million,  representing  some  83%  of  the  revenue  recorded  at  31 December
2002. Monetary portfolio income stood at € 12.9 million, or 18% of the total result,
the rest (-1%) being commission and financial charges (see Annex III.1).

10

2.

2.1

SITUATION OF THE FUND

The Fund's resources at 31 December 2002

The  Guarantee  Fund  balance  decreased  by  € 200  million,  or  more  than  13%,  from
€ 1 494 million at 31 December 2001 to € 1 294 million at 31 December 2002.

This is due to the movements shown in the following table:

Resources

Provisioning

Repayment of surplus

Activation of guarantee

Recovery of amounts guaranteed

Situation at             
31/12/2001

Movements in 2002

Situation at 
31/12/2002

+

-

-

+

2.031.879.500,00

171.810.662,91

2.203.690.162,91

637.060.000,00

372.460.000,00

1.009.520.000,00

468.662.140,15

568.217.579,44

468.662.140,15

568.217.579,44

Balance

1.494.374.939,29

-200.649.337,09

1.293.725.602,20

Between 1 January 2002 and 31 December 2002, the Fund's guarantee was not activated, nor
were any guaranteed amounts recovered from defaulting debtors.

2.2

The Fund's assets at 31 December 2002

The Fund's assets at 31 December 2002 came to € 1 612.6 million, broken down as below. It
should be remembered that the Fund operates in one currency only - the euro.

– 

– 

– 

3.

3.1

€ 299.5 million in the monetary portfolio (interbank term deposits)

€ 1.9 million in the current account

€ 1311.2 million in the  investment portfolio (fixed-rate and  variable-rate  securities)
(see table in 3.1).

GENERAL AND SEGMENTAL ANALYSIS OF THE GUARANTEE FUND.

Liquidity analysis

The portfolio is now characterised by a bolstered fixed-rate segment, as agreed between the
EIB and the Commission in 2001. In the final quarter of 2001, the strategy of increasing the
proportion  invested  in  this  segment  was  gradually  implemented,  with  the  duration  of
investment also being increased.

At  31 December  2002,  the  fixed-rate  segment  thus  accounted  for  over  two-thirds  of  bond
investment, whereas the strategy pursued in previous years had set this share at around 50%.
The term to maturity of this segment is now almost 4.22 years (maturity terms ranging from 0
to  10  years)  compared  with  a  level  maintained  in  previous  years  at  between  2.20  and  2.50
years (maturity terms ranging from 0 to only 5 years).

11

The Guarantee Fund's liquid assets were distributed as follows at 31 December 2002:

Segments

Fixed-rates investments

Variable-rate

TOTALS

Less than 3 months

3 months to 1year

1 to 10 years

securities

Current accounts

1 863 221.88

Fixed-term deposits

299 500.000.00

1 863 221.88

299 500 000.00

Securities portfolio

23 688 625.15

102 221 925.48

 985 343 187.07

200 001 464.75

1 311 255 202.45

TOTALS

325 051 847.03

102 221 925.48

 985 343 187.07

200 001 464.75

1 612 618 424.33

%

3.2

20.16

6.34

61.10

12.40

100.00

General analysis of the results of the Fund

Overall, the Guarantee Fund produced € 71.8 million in net revenue, an overall average yield
of 4.21%1 on average capital of € 1 682 million. The three-month Euribid reference rate stood
at 3.20% over the same period, giving an overall positive spread of 101 basis points above the
reference benchmark (cf. 3.3.1)

Investment income at 31 December 2002 was as follows:

January - December 2002
( in € million)

Interest on interbank term deposits
Interest on securities
Gain on sale of financial fixed assets
Premium/discount spread
Commission and financial charges

Total

12,9
61
1,3
0,2
-2,7
-0,9

71,8

3.3

Analysis by segment

3.3.1

Performance analysis of treasury operations

The average  yield on money-market investments in  2002  stood  at  3.33%.,  compared  with  a
benchmark average yield of 3.21%.

The  spread  calculated  this  way  is  12  basis  points  above  the  three-month  Euribid  variable
reference rates2 for 2002, as against a spread of 31 basis points in 2001. This spread does not
reflect the margin obtained at the beginning of operations, and  this  margin  is not taken  into
consideration when calculating yield.

1

2

The basis for calculating the overall yield is: act/360.
The  treasury  spread  measures  the  difference  between  the  actual  interbank  investment  rate  obtained  and  the
benchmark variable, which is the three-month Euribid rate for that day.

12

                                                
PERIOD

YIELD

THREE-MONTH EURIBID
REFERENCE

SPREAD

(basis points)

January – December 2002

3.33 %

3.21%

12

Interbank investments in 2002 produced € 12.9 million in interest on capital averaging € 381
million.

Changes in yield and reference rates in 2002. The table below shows the rates obtained for
short-term  money-market  investments  as  compared  with  the  three-month  Euribid  reference
rate.

3.50%

3.40%

3.30%

3.20%

3.10%

3.00%

2.90%

2.80%

Yield

3-month Euribid

Ja

Fe Ma

Ap Ma

Ju

Jul

Au

Se Oc

No De

Fig. 2: Yield in relation to the benchmark rate

The methodology used to calculate  yield  involves comparing  the  yield of (usually  3-month)
monetary investments with the daily average of the 3-month LIBID rate. This means that the
benchmark  tracks the  average movement  of the 3-month  LIBID rate  on a daily  basis, while
the  investments  recorded  in  Buy  and  Hold  do  not  reflect  it  until  later.  This  produces  a
mechanical effect which makes itself felt as follows:

– 

– 

In  a  context  of  falling  short-term  interest  rates,  the  monetary  portfolio  broadly
outperforms the benchmark (Fig. 2, June-December 2002)

Conversely, in a context where monetary  rates  gradually  rise over  a  relatively long
period (six months), the performance of the monetary portfolio tends to be closer to
that of the benchmark (Fig. 2, January-June 2002).

Profile of counterparties

In accordance with the agreement between the Community and the EIB on the management of
the Guarantee Fund, all the securities held have a minimum credit rating of A1.

13

Aa1
10%

Aa2
14%

Aa3
76%

Fig. 3: Breakdown of short-term deposits by type of counterparty at 31 December 2002

Geographical breakdown

The  geographical  breakdown  of  the  Fund's  short-term  interbank  investments  (in  terms  of
average capital) in 2002 is as follows:

 In € million

   IT

80

70

60

50

40

30

20

10

       0

    DE

 FR

  LU

    IRL

  S

   AU

B

NL

ES

    UK

DA

GR

Fig. 4: Short-term interbank investments: geographical distribution of average capital

The  EIB  is  pursuing  its  objective  of  a  better  geographical  distribution  throughout  the
countries of the European Union while at the same time maintaining the competitiveness of
the yield obtained.

3.3.2

Analysis of bond portfolio results

The bond portfolio, seen as a long-term investment portfolio, is made up of euro-denominated
securities acquired with the intention of keeping them until maturity. At 31 December 2002,
fixed-interest  securities  with  a  residual  period  to  maturity  of  less  than  three  months  and  of

14

between 3 months and 1 year totalled, respectively, € 23.7 million and € 102.2 million, other
fixed-rate securities with a residual period to maturity of between 1 and 10 years amounted to
€ 985.3 million, while variable-rate securities stood at € 200.0 million

The portfolio yielded revenue of € 58.3 million at 31 December 2002, which breaks down as
follows:

Interest received

Premium/discount spread

61 001 453.32

-2 712 785.37

58 288 667.95

In  addition,  sales  of  three  securities  produced  a  gain  of  € 1.4  million.  The  securities  in
question  were  Jumbo-Pfandbriefe  and  were  sold  under  the  terms  of  the  management
guidelines because their ratings fell from AAA to AA1 or AA2. The total revenue  from the
portfolio was therefore € 59.7 million.

The  starting  value  of  the  securities  in  this  portfolio  is  the  acquisition  cost.  The  difference
between  the  entry  price  and  the  redemption  value  is  the  premium/discount  spread,  which  is
divided pro rata temporis over the remaining life of each of the securities. At 31 December
2002,  the  nominal  value  of  the  investment  portfolio  was  € 1 298.4  million,  against  a  book
value of € 1 311.3 million (including the premiums and discounts to be written off).

The book yield on the investment portfolio came to 4.48%3 at 31 December 2002, compared
with  4.61%  at  31  December  2001.  In  terms  of  a  Salomon  index  reference  benchmark  for
fixed-rate  securities4  and  the  three-month  Euribid  for  variable-rate  securities,  the  overall
spread is positive by  73  basis  points  compared with the  aggregate  benchmark of 3.75% (cf.
Annex 2). This positive performance is largely explained by the general fall in interest rates
since  the  beginning  of  2002.  The  majority  of  new  investments  were  in  securities  with  a
maturity  of  5  to  10  years,  which  translates  into  a  significant  lengthening  of  the  portfolio's
duration. It has to be borne in mind, however, that the benchmark yield reflects actual changes
in rates, while the portfolio's yield reflects an average based on acquisition prices.

German government bond rates in 2002 (source: Bloomberg):

31/12/2001

31/03/2002

30/06/2002

30/09/2002

31/12/2002

Bund 3y

Bund 5y

Bund 7y

Bund 10y

3.67

4.06

4.46

4.79

4.57

4.91

5.13

5.26

4.14

4.49

4.80

4.94

3.27

3.60

3.98

4.27

2.91

3.39

3.87

4.20

3

4

The basis for calculating the yield of the investment portfolio is: act/365.
This benchmark will be adjusted once the new strategy has been officially adopted by the EIB and the Commission
in order to reflect the longer duration and the possibility of investing up to a maturity of 10 years.

15

                                                
By  way  of  information,  at  31  December  2002  the  market  value  of  the  investment  portfolio
came  to  € 1 355.10  million  compared  with  a  book  value  of  € 1 311.3  million  (including
premiums/discounts),  which  gives  an  unrealised  gain  of  € 43.84  million,  compared  with  an
unrealised gain of € 4.70 million and a book value of € 1 244.1 million at 31 December 2002.

Changes to the way performance is measured are planned for 2003. In the light of the planned
changes  in  the  Fund's  investment  strategy,  it  was  decided  to  concentrate  the  annual
reinvestment in securities on a particular period of the year. In this context, the performance
of these reinvestments will be assessed and reported at the time they are realised. Performance
will be measured by the difference between the yield obtained from the securities purchased
and that of IBOXX indices for corresponding maturity categories over the same period.

Market value compared with book value in 2002

in

 €

   Mio.

1,400.00
1,380.00
1,360.00
1,340.00
1,320.00
1,300.00
1,280.00
1,260.00
1,240.00
1,220.00
1,200.00

Ja

Fe Ma Ap Ma

Ju

Jul Au

Se Oc No De

Book value

Market value

Fig.5: Market value compared with book value in 2002

At 1 January 2002, the following security reimbursements were scheduled for the year:

€ 108 million for fixed-rate securities

€ 202 million for variable-rate securities

i.e. a total of € 310 million.

However,  at  the  end  of  April  there  was  a  concentration  of  about  € 188 million  in
reimbursements.  In  order  to  reduce  the  timing  risk,  the  Bank  decided  to  spread  the
reinvestments  of  equivalent  amounts  between  January  and  May  2002  by  drawing  the  funds
from monetary investments. Thus by the end of May the amount allocated to securities at the
beginning  of  the  year  was  recovered,  particularly  since  a  major  provisioning  of  the  Fund
scheduled  for  July  no  longer  required  a  topping-up  of  the  fixed-rate  part.  Additional
investments were made once this provisioning had taken place in order to adjust to the target
allocation. Lastly, the accelerated decline in rates in the second quarter increased the potential
profit level.

16

Breakdown of the portfolio between fixed-rate and variable-rate securities

VAR.

  RATE

15%

FIXED RATE
85%

Fig.6: Breakdown of the investment portfolio between fixed-rate and variable-rate securities
at 31 December 2002

Redemption profile of investment portfolio:

In € million

250

200

150

100

50

0

Variable
Fixed

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fig.7: Investment portfolio: Redemption profile at 13 September 2002

The latest final maturity date for fixed-rate securities is 13 September 2012

Profile of issuers

All the securities held meet the following criteria :

– 

either  they  are  issued  by  States  in,  or  by  institutions  guaranteed  by,  the  European
Union, the G10 or supranational bodies;

17

– 

– 

or they are issued by another sovereign State with a rating of at least AA3;

or they are issued by another issuer with a rating of AAA.

The profile of issuers was as follows at 31 December 2002:

Other issuers

AAA
35%

Govt./Agencies
govt.NA
1%

Govt./Agencies
govt.A2
10%

Govt./Agencies
govt.AA1
15%

Other issuers NA

Other issuers AA1

1%

1%

Supra
3%

Govt./Agencies
govt.AAA
23%

Govt./Agencies
govt.AA3
3%

Govt./Agencies
govt.AA2
8%

Fig. 8: Investment portfolio: The profile of issuers at 31 December 2002

18

ANNEX III.1

SITUATION OF THE GUARANTEE FUND AT 31.12.2002

ASSETS

Balances with credit institutions

CURRENT ACCOUNT
FIXED-TERM DEPOSITS (Note A)

Portfolio

INVESTMENT PORTFOLIO (Note B)

Other assets

ACCRUALS (Note C)

LIABILITIES

Guarantee Fund

Other liabilities

Result

GUARANTEE FUND

ACCRUALS (Note D)

RESULT CARRIED OVER
RESULT FOR 2002

PROFIT AND LOSS AT

Interest on securities
Gain on sale of financial fixed assets Financières
Interest on investments
Interest on current account
Spread of premiums or discounts (Note E)
Commission
Financial charges

RESULT

19

31/12/2002

1 863 221.88
299 500 000.00
301 363 221.88

1 311 255 202.45
1 311 255 202.45

33 673 263.65
33 673 263.65

TOTAL

1 646 291 687.98

31/12/2002

1.293.725.602,20
1.293.725.602,20

737.316,27
737.316,27

280.049.012,34
71.779.757,17
351.828.769,51

TOTAL

1.646.291.687,98

31/12/2002

61 001 453.32
1 361 491.61
12 898 616.22
175 770.26
-2 712 785.37
-737 316.27
-207 472.60

71 779 757.17

ANNEX III.2

PERFORMANCE OF THE GUARANTEE FUND'S BOND INVESTMENT PORTFOLIO

Starting value
Average capital

Percentage
Variable-rate

Percentage
Fixed-rate

in €

Portfolio
yield

a/365

YTM Salomon
benchmark*

a/365

Libid 3-mth.
benchmark
in a/365

Aggregate
benchmark

Spread

in bp

Annual
2001

Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02

Annual
2002

1 055 173 356

39.9%

60.1%

4.61%

4.29%

4.20%

4.26%

1 265 684 611
1 311 893 416
1,357,858,024
1 368 737 144
1 246 673 462
1 263 501 907
1 285 277 155
1 286 842 588
1 296 356 670
1 303 827 162
1 312 585 018
1 311 345 496

31.7%
30.5%
28.5%
26.6%
21.1%
20.8%
20.5%
20.4%
19.0%
15.4%
15.2%
15.2%

68.3%
69.5%
71.5%
73.4%
78.9%
79.2%
79.5%
79.6%
81.0%
84.6%
84.8%
84.8%

4.35%
4.30%
4.34%
4.40%
4.52%
4.53%
4.56%
4.55%
4.56%
4.58%
4.56%
4.53%

3.92%
4.10%
4.11%
4.46%
4.27%
4.39%
4.10%
3.85%
3.67%
3.31%
3.39%
3.37%

3.25%
3.27%
3.32%
3.34%
3.38%
3.39%
3.33%
3.26%
3.23%
3.18%
3.05%
2.86%

3.71%
3.85%
3.88%
4.16%
4.09%
4.18%
3.94%
3.73%
3.59%
3.29%
3.34%
3.29%

35

64
45
45
24
43
35
61
82
97
129
122
124

1 300 688 223

22.1%

77.9%

4.48%

3.91%

3.24%

3.75%

73

* Salomon index =

EGBI 1-3 years

EGBI 3-5 years

3 M eurodeposit

45.0%

45.0%

10.0%

The performance of the bond portfolio is measured by taking the difference, expressed in
basis  points,  between  the  yield  of  the  portfolio  calculated  on  the  basis  of  the  yields  on
acquisition  of  the  securities  in  the  portfolio  and  the  yield  of  the  aggregate  benchmark
calculated  on  the  basis  of  the  YTM  rates  observed  on  the  date  of  the  report,  which
combines the yield of the Salomon benchmark and the 3-month Libid rate proportionally
to the fixed-rate and variable-rate securities in the portfolio.

20

ANNEX III.3

CONSOLIDATED FINANCIAL BALANCE SHEET OF THE GUARANTEE FUND AT

31 DECEMBER 2002

21

CONSOLIDATED FINANCIAL BALANCE SHEET OF THE GUARANTEE FUND AT 31 DECEMBER 2002

ASSETS

LIABILITIES

31 December 2002 31 December 2001

31/12/2002

31/12/2001

€

     Current account
     Fixed-term deposits
Portfolio
     Investment portfolio
Receivables from recipients of loans granted or guaranteed
by the Community
     Arrears covered by the Fund (1)
     Default interest incurred but not received
Other assets
     Accruals

1.863.221,88
299.500.000,00

25.491.970,66 Guarantee Fund

475.100.000,00      Payments from the budget (2)

      - surplus to be paid to the budget

1.311.255.202,45

1.244.130.504,71      Default interest accrued but not received

925.749.500,00
263.330.000,00

1.022.359.500,00
372.460.000,00

33.673.263,65

Other liabilities
     Accruals (3)
Résultat
30.506.522,06      Result carried over 

     Result for financial year 

737.316,27

805.045,80

379.604.451,63
76.870.420,08

250.041.413,12
129.563.038,51

TOTAL ASSETS                                                                                

1.646.291.687,98

1.775.228.997,43

TOTAL LIABILITIES

1.646.291.687,98

1.775.228.997,43

     Interest on securities
     Gain on sale of financial fixed assets
     Interest on investments
     Interest on current account
     Default interest received on late recoveries
     Commission recovered (3)

PROFIT AND LOSS AT 31 DECEMBER 2002

31/12/2002

61.001.453,32
1.361.491,61
12.898.616,22
175.770,26
0,00
5.090.662,91

31/12/2001
52.091.535,56      Premium/discount spread
0      Commission

21.824.796,33      Financial charges
159.108,52 TOTAL COSTS (B)
59.987.652,19 NET RESULT (A-B)

0,00

31/12/2002

31/12/2001

2.712.785,37
737.316,27
207.472,60
3.657.574,24
76.870.420,08

3.547.010,86
805.045,80
147.997,43
4.500.054,09
129.563.038,51

TOTAL REVENUES (A)

80.527.994,32

134.063.092,60 TOTAL CHARGES AND NET RESULT

80.527.994,32

134.063.092,60

(1) Capital, interest and default interest covered by payments from the Fund.
(2) Reduced by € 1009.52 million (the overall surplus repaid to the statement of revenue in the budget of the European Communities in accordance with Article 3
 of Regulation 2728/94 establishing the Guarantee Fund. 
(3) EC/EIB agreement of 14 May 2002 under the agreement on using the guarantee to clear debts (amount transferred to the Fund on 2 August 2002)

22