Proposal for a Council Regulation amending Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for external actions
Date: 2005-04-05
Institutions: European Commission
Subjects: Community loan, European Investment Bank, credit guarantee, financial management, fund (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 5.4.2005 
COM(2005) 130 final 

2005/0025 (CNS) 

Proposal for a 

COUNCIL REGULATION 

amending Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for 
external actions 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION / MOTIVATION 

The  purpose  of  this  amendment  to  Council  Regulation  (EC,  Euratom)  No  2728/94  of  31 
October  1994  establishing  a  Guarantee  Fund  for  external  actions1  (the  “Regulation”)  is  to 
improve the rules of the provisioning mechanism of the Guarantee Fund (the “Fund”), i.e. the 
rules that determine how the Fund’s assets are brought in line with the target amount of the 
Fund. 

Experience  has  shown  that  the  present  rules  have  often  led  to  an  over-provisioning  of  the 
Fund and therefore a sub-optimal use of budgetary funds. This problem has mainly been due 
to the use of uncertain forecast figures in the provisioning process. Furthermore, the present 
rules result in several transfers in and out of the Fund during one year, a situation that creates 
unnecessary  administrative  procedures  involving  not  only  the  Commission  services  but  also 
the two arms of the budgetary authority. 

The proposed amendment is in line with the needs identified in the Comprehensive Report on 
the functioning of the Guarantee Fund (COM (2003) 604). 

This amendment is limited to changes of the Fund’s provisioning mechanism. 

2. 

THE FUND 

The  Regulation  established  a  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. The main function of the Fund is to shield the Union budget 
from shocks due to defaults on loans or guaranteed loans covered by the Fund. The Fund is 
provisioned from the Union budget and has to be maintained at a certain percentage, the target 
rate (currently 9%), of the outstanding amount of the loans and loans guaranteed covered by 
the Fund. 

The  present  provisioning  mechanism  is  based  on  an  ex-ante  provisioning  of  individual 
Council decisions (Macro-financial assistance), individual forecasts of Commission decisions 
(Euratom  loans)  or  a  global  annual  forecast  of  planned  loan  signatures  (EIB  guaranteed 
lending).  

3. 

THE NEW PROVISIONING MECHANISM 

3.1. 

Basic principles of the new provisioning mechanism 

The proposed new mechanism is based on an ex-post provisioning linked to the outstanding 
amount  of  loans  and  guaranteed  loans,  i.e.  on  actual  net  disbursements  (i.e.  disbursements 
minus amortizations minus cancellations). 

1 

OJ L 293, 12.11.1994, p. 1. Regulation as amended by Regulation (EC, Euratom) No 1149/1999 (OJ L 
139, 2.6.1999, p. 1) and by Regulation (EC, Euratom) No 2273/2004 (OJ L 396, 31.12.2004, p. 28). 

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In this context,  one of the main advantages  of the new provisioning system  is its simplicity 
and  its  certainty  about  the  budgetary  requirements.  Under  the  new  mechanism,  all  figures 
necessary  to  determine  the  transfer  from  the  budget  to  the  Fund  (or  from  the  Fund  to  the 
budget) are known with certainty when the Preliminary Draft Budget (PDB) process starts and 
there  is  no  need  for  forecasts  (and  the  unavoidable  forecast  errors)  and  ex  post  budgetary 
adjustments. 

In order to avoid the present practice of several transfers into the Fund during a year and a 
single payment from the Fund to the budget, only one net transfer between the Union budget 
and the Fund per year will occur under the new provisioning mechanism.  

This  simplification  compares  favourably  with  the  present  system  which  leads  to  numerous 
comparably high flows in and out of the Fund. For example, during the period 2000 – 2004, 
about  EUR  894  million  have  been  paid  into  the  Fund  in  13  transfers  (the  highest  single 
amount being EUR 169 million) and about EUR 1.132 million have been paid back to budget 
in 5 annual payments resulting in a net transfer from the Fund to the Union budget of about 
EUR  238  million  over  this  period.  Compared  to  this  total  of  18  payments,  the  new  system 
would  have  resulted  in  only  5  annual  payments.  According  to  simulations  of  the  new 
mechanism assuming it had started in 1999, the highest annual single payment from the Union 
budget to the Fund would have been about EUR 88 million. 

The single annual transfer is calculated as follows: 

(a) 

(b) 

(c) 

application  of  the  target  rate,  currently  9%,  to  the  amount  of  loans  and 
guaranteed loans outstanding, 

determination of the actual value of the Fund’s assets, including interest earned 
and losses caused by calls on the Fund, 

transfer of the difference a) minus b) from the budget into the Fund (or to the 
budget in case of a resulting surplus in the Fund). 

In a chronological view, the provisioning would take place in the following way: 

Based  on  year-end  outstanding  amounts  of  loans  and  loans  guaranteed  in  year  “n-1”  the 
required provisioning  amount is calculated at the beginning of the year “n”. This amount is 
asked for in the PDB and a respective credit on the corresponding budget line is obtained at 
the beginning of the year “n+1”. Respectively, in case of a surplus of the Fund’s assets over 
the  Fund’s  target  amount,  an  income  to  the  budget  will  be  entered  in  the  PDB  for  the  year 
“n+1”. 

This implies a time lag between the moment when the year-end outstanding amount is known 
and the actual provisioning of about one year (January of year “n” to January/February of year 
“n+1”). This time lag is justified by the certainty of data and the improved transparency and 
predictability of the budgetary impact of the provisioning mechanism. This is not to be seen 
as an under-funding of the Fund. In fact, once inscribed in the draft budget for the following 
year, the amounts due can be considered as a sort of deferred payment by the Union budget 
similar to “capital not yet paid in” in the case of companies. 

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3.2.  Mitigating  the  impact  of  major  losses  caused  by  loan  defaults  on  the  need  to 

increase payments into the Fund - a smoothing mechanism 

In case of major defaults a smoothing mechanism is foreseen, in order to maintain the Fund’s 
main purpose, i.e. to act as a shock absorber for the Union budget. 

Losses  caused  by  defaults  on  loans  and  guaranteed  loans  in  year  “n-1”  would,  without  a 
specific rule, translate directly into an increase in the transfer to the Fund in the year “n+1”. 
The role of the Fund to act as a cushion to protect the budget from unexpected expenditure 
shocks could be compromised.  

This problem  is dealt  within  the proposal by the introduction of a smoothing mechanism to 
“spread” the impact of important losses due to defaults over several years. As smaller losses 
can  be  absorbed  by  the  budget  without  problems,  the  smoothing  mechanism  would  only  be 
triggered if the losses would exceed a certain amount. 

A threshold amount of EUR 100 million is proposed, based on the following reasoning: 

According  to  estimates,  based  on  various  scenarios  including  a  possible  increase  of  the 
growth rate of loans and guaranteed loans during the next Financial Perspectives, the annual 
amount required for the “normal” provisioning would rarely exceed €100 million per year. If 
an  amount  of  EUR  100  million  to  cover  default–induced  losses  to  the  Fund  (the  maximum 
amount  of  losses  that  are  absorbed  by  the  “normal”  provisioning  mechanism  without 
triggering  the  smoothing  mechanism)  or  peaks  in  lending  activity  is  added  to  this 
provisioning,  the  maximum  annual  budget  transfer  to  the  Fund  would,  under  reasonable 
assumptions,  be  limited  to  an  order  of  magnitude  similar  to  the  2005  amount  of  the  budget 
Reserve for the Fund (EUR 223 million). 

An additional argument in favour of a smoothing mechanism setting in if losses exceed EUR 
100 million is that the highest annual risk2 for a given country is at present less than EUR 250 
million,  i.e.  an  amount  which,  in  addition  to  the  normal  provisioning,  would  put  too  much 
strain on the budget for a given year. Obviously, it cannot be excluded either that more than 
one  default  could  materialise  during  one  year,  or  that  the  amounts  would  accumulate  over 
time when a default situation persists for several years, which further supports the creation of 
a smoothing mechanism. 

It  should  be  noted  that  the  smoothing  mechanism  works  independently  from  the  “normal” 
provisioning which would continue in its regular way. Over the smoothing period, each year 
the budget resources used for the smoothing transferred to the Fund portfolio (i.e. a maximum 
of EUR 100 million p.a.) would be deducted from the total amount to be recovered from the 
budget  when  the  amount  is  effectively  transferred  to  the  Fund  (together  with  the  “normal” 
provision transfer) until the full amount is paid into the Fund. This solution has the advantage 
of being fully transparent by indicating which amount of the total annual provisioning of the 
Fund  is  due  to  the  normal  provisioning  and  which  amount  is  due  to  the  amortisation  of  the 
amounts to be recovered from the budget under the smoothing mechanism. 

2 

As defaults  do  usually  not  lead  to  an  acceleration of  the whole  credit  amount,  the  annual risk  can be 
defined as the amounts due in one year for amortisation and interest. 

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The  length  of  the  smoothing  period  would  depend  on  the  amount  of  the  overall  default 
induced loss or series of losses to be recovered from the budget. For example the repayment 
of a loss of EUR 350 million that occurred in 2010 would be spread over a period ending in 
the year 2015 (EUR 100 million in 2012-2014 and EUR 50 million in 2015). The amounts to 
be recovered from the budget under the smoothing mechanism would be treated like an asset 
of  the  Fund,  i.e.  be  included  in  the  Fund’s  assets  when  the  “normal”  provisioning  is 
calculated. 

In  order  to  avoid  that  the  Fund,  in  the  extremely  unlikely  case  of  a  series  of  severe  losses, 
would fall below a critical level of 50 % of the target rate, where there would be insufficient 
funds  to  ensure  the  role  of  the  Fund  as  shock  absorber  for  the  budget,  it  is  foreseen  to 
maintain  the  provision  (current  Art.  5(2)  would  become  Art.  5(3))  according  to  which  the 
Commission  would  submit  a  report  to  the  budgetary  authority  on  exceptional  measures  to 
replenish the Fund. 

3.3. 

Financial  implications  of  the  new  provisioning  mechanism  and  the  financial 
statement 

In  the  financial  statement,  an  amount  equal  to  the  “normal”  provisioning  (= provisioning  to 
cover the amount of outstanding loans and guaranteed loans plus up to EUR 100 million for 
losses)  of  up  to  about  EUR  200  million  has  been  indicated.  This  amount  is  the  result  of 
simulations that are based on the past observed growth rates of the amounts outstanding and 
the occurrence of default-induced losses of up to EUR 100 million p.a.  

As explained in the previous section, in the very unlikely case that the smoothing mechanism 
would  be  triggered  in  case  of  major  default-induced  losses  to  the  Fund,  these  “smoothing” 
amounts  would  be  added  to  the  amount  to  be  paid  by  the  budget  under  the  “normal” 
provisioning. However, the design of the provisioning mechanism ensures that in any given 
year the default-induced amounts to be paid by the budget will never exceed EUR 100 million 
p.a. in addition to the “normal” provisioning and, therefore, the amount of EUR 200 million 
will not be exceeded under normal circumstances.  

It should, however, be noted that important changes in the growth rate of the amounts of loans 
and  loans  guaranteed  would  have  an  impact  on  the  budgetary  resources  needed  for  the 
Guarantee Fund. An example for such a situation could be a strong increase in the guaranteed 
lending activities of the European Investment Bank in the context of the new mandate for the 
next Financial Perspectives 2007-2013. 

If a surplus of the Fund’s assets over the target amount materialises at the end of a given year 
“n-1”, e.g. due to high amortisations, high returns on the Fund’s portfolio or the recovery of 
outstanding defaults, this amount would be paid to a special budget line at the beginning of 
the year “n+1” as a revenue in the same way as a provisioning. The Member States would in 
this  case  not  be  penalised  compared  to  the  present  provisioning  mechanism  as  the  surplus 
amount would be entered in year “n” in the PDB for the year “n+1” as a revenue. 

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4. 

TRANSITION PERIOD 

During  the  first  year  of  its  application,  i.e.  as  of  1  January  2006,  the  new  provisioning 
mechanism implies that no budgetary transfers will occur (change from an ex-ante to an ex-
post approach). However, as it is possible that new loan decisions occur towards the very end 
of 2005, payments between the budget and the Fund that could, due to administrative delays, 
under such conditions only be made in the first year of the application of the new provisioning 
mechanism should still be carried out as foreseen under the current Regulation. 

It should also be noted that the amendment can for obvious budgetary reasons only take place 
at  the  beginning  of  a  year.  Should  the  1  January  2006  starting  date  not  be  feasible,  the 
amendment  should  take  effect  at  the  first  January  of  the  year  following  its  adoption  by  the 
Council. 

5. 

CONCLUSION 

The main improvements for the Fund’s provisioning mechanism are: 

– 

– 

The  improvement  of  the  efficiency  of  the  use  of  budgetary  means  and  reducing  to 
one the number of annual transfers between the Union Budget and the Fund; 

A  provisioning  based  on  the  variations  of  the  observed  net-disbursements,  thus 
creating  more 
the  budgetary 
improving 
programming. 

transparency  and 

the  precision  of 

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2005/0025 (CNS) 

Proposal for a 

COUNCIL REGULATION 

amending 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 308 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 Commission3, 

Having regard to the opinion of the European Parliament4, 

Having regard to the opinion of the Court of Auditors5, 

Whereas: 

(1) 

(2) 

(3) 

3 
4 
5 
6 

7 
8 

The efficiency of the use made of budgetary means reserved for the Guarantee Fund 
established  by  Council  Regulation  (EC,  Euratom)  No  2728/946  should  be  improved 
and  the  administrative  work  related  to  the  budgetary  management  of  the  Guarantee 
Fund should be reduced. 

The  transparency  and  programming  of  budgetary  transactions  in  relation  to  the 
provisioning of the Guarantee Fund should be enhanced. 

The  2006  reserve  amount  under  the  Financial  Perspectives  2000  -  2006  is  fixed  at 
EUR 229 million7  (current  prices)  according  to  point 15  of  the  Interinstitutional 
Agreement  of  6  May  1999  between  the  European  Parliament,  the  Council  and  the 
Commission on budgetary discipline and improvement of the budgetary procedure8. 

OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ  L  293, 12.11.1994, p. 1. Regulation  as last  amended by  Regulation (EC,  Euratom)  No 2273/2004 
(OJ L 396, 31.12.2004, p.28). 
COM(2004) 837 final 
OJ C 172, 18.6.1999, p. 1. 

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(4) 

(5) 

Should the reserve created to endow the Guarantee Fund be abolished for the Financial 
Perspectives 2007–2013, the funding of the Guarantee Fund should be provided for as 
an obligatory expenditure from the general budget of the European Union. 

The main function of the Guarantee Fund, namely to shield the general budget of the 
European Union against shocks due to defaults on loans or guaranteed loans covered 
by the Fund, should be maintained. 

(6) 

Regulation (EC, Euratom) No 2728/94 should therefore be amended accordingly. 

(7) 

The  Treaties  do  not  provide,  for  the  adoption  of  this  Regulation,  powers,  other  than 
those in Article 308 of the EC Treaty and Article 203 of the Euratom Treaty, 

HAS ADOPTED THIS REGULATION: 

Article 1 

Regulation (EC, Euratom) No 2728/94 is hereby amended as follows: 

1. 

In Article 2, the first indent is replaced by the following: 

‘– one annual payment from the general budget of the European Union pursuant to 
Articles 4 and 5,’; 

2. 

In Article 3, the third paragraph is replaced by the following: 

‘On  the  basis  of  the  year-end  “n-1”  difference  between  the  target  amount  and  the 
value of the Guarantee Fund’s net assets, calculated at the beginning of the year “n”, 
any surplus shall be paid in one transaction to a special heading in the statement of 
revenue in the general budget of the European Union of the year “n+1”.’; 

3. 

Article 4 is replaced by the following: 

“Article 4 

Based on the year-end “n-1” difference between the target amount and the value of 
the  Guarantee  Fund’s  net  assets,  calculated  at  the  beginning  of  the  year  “n”  ,  the 
required  provisioning  amount  shall  be  paid  into  the  Fund  in  one  transaction  in  the 
year “n+1” from the general budget of the European Union.”; 

4. 

Article 5 is replaced by the following: 

“Article 5 

If, as a result of one or more defaults, the activation of guarantees during year 
1. 
“n-1”  exceeds  EUR 100  million,  the  amount  exceeding  EUR  100  million  shall  be 
paid  back  into  the  Guarantee  Fund  in  annual  tranches  starting  in  year  “n+1”  and 
continuing  over  the  following  years  until  full  repayment  (smoothing  mechanism). 
The size of the annual tranche is the lesser of the following: 

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–  EUR 100 million or 

–  the remaining amount due in accordance with the smoothing mechanism. 

2. 
The calculations based on this smoothing mechanism shall be made separately 
from  the  calculations  referred  to  in  Article  3,  third  paragraph,  and  in  Article  4. 
Nevertheless, they will together result in one annual transfer. The amounts to be paid 
from  the  general  budget  of  the  European  Union  under  this  smoothing  mechanism 
shall be treated as net assets of the Fund for the calculation pursuant to Articles 3 and 
4. 

3. 
If,  as  a  result  of  the  activation  of  guarantees  on  one  or  more  major  defaults, 
resources  in  the  Fund  fall  below  50  %  of  the  target  amount,  the  Commission  shall 
submit  a  report  on  exceptional  measures  that  might  be  required  to  replenish  the 
Fund.” 

5. 

The Annex is deleted. 

This Regulation shall enter into force on 1 January 2006. 

Article 2 

This  Regulation  shall  not  apply  to  ongoing  Community  borrowing  or  lending  operations  or 
guarantees to financial bodies of the type envisaged in point (a) of paragraph 1 of the Annex 
to  Regulation  (EC,  Euratom)  No  2728/94,  if  those  operations  or  guarantees  have  been 
initiated or granted during the calendar year 2005. 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

Done at Brussels,  

For the Council 
The President 

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FINANCIAL STATEMENT 

1. 

2. 

3. 

4. 

5. 

BUDGET HEADING: 
Heading 6 (for 2006) and Heading 4: The EU as a global partner (as from 2007) 
TITLE: 
Loan guarantees for third countries 
LEGAL BASIS: 
Proposal for a Council Regulation amending Regulation (EC, Euratom) No 2728/94 establishing a 
Guarantee Fund for external actions 
AIMS: 
To endow the Guarantee Fund for external actions 
FINANCIAL IMPLICATIONS 

DATE:  
APPROPRIATIONS: 

YEAR 
n 
(EUR million) 

FOLLOWING 
FINANCIAL 
YEARS 
(EUR million) 
200 

5.0 

EXPENDITURE 

0 

Item 01 04 01 14 Payments to the Guarantee 
Fund in respect of new operations 

5.1  REVENUE 

Item 302 Surplus own resources resulting from 
repayment of the surplus from the Guarantee 
Fund for external actions 

5.0.1  ESTIMATED EXPENDITURE 
5.1.1  ESTIMATED REVENUE 
5.2  METHOD OF CALCULATION: 

p.m. 

p.m. 

[n] 
0 
p.m. 

200 
p.m. 

Normal provisioning for operations is estimated to an amount of EUR 100 million. Another amount of 
EUR 100 million is added in order to cover major defaults resulting of the activation of guarantees. 

6.0  CAN THE PROJECT BE FINANCED FROM APPROPRIATIONS ENTERED IN THE 

RELEVANT CHAPTER OF THE CURRENT BUDGET? 

NO 

6.1  CAN THE PROJECT BE FINANCED BY TRANSFER BETWEEN CHAPTERS OF 

THE CURRENT BUDGET? 

6.2  WILL A SUPPLEMENTARY BUDGET BE NECESSARY? 
6.3  WILL APPROPRIATIONS NEED TO BE ENTERED IN FUTURE BUDGETS? 
OBSERVATIONS: 
Year 2006 
If the proposal is adopted before 31.12.05, the amount is zero. Otherwise, the actual regulation applies and 
therefore the Guarantee Reserve is set at EUR 229 million (current prices). 

NO 
NO 
YES 

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