Commission staff working paper - Annex to the Report from the Commission - Annual Report from the Commission on the Guarantee Fund and its Management in 2004 {COM(2005)262 final}
Date: 2005-06-21
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)













EUR-Lex - 52005SC0807 - EN






Important legal notice




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52005SC0807

Commission staff working paper - Annex to the Report from the Commission - Annual Report from the Commission on the Guarantee Fund and its Management in 2004 {COM(2005)262 final}  /* SEC/2005/807 */  








[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |Brussels, 21.6.2005SEC(2005)807COMMISSION STAFF WORKING PAPERAnnex to the REPORT FROM THE COMMISSION Annual Report from the Commission on the Guarantee Fund and its Management in 2004 {COM(2005)262 final}TABLE OF CONTENTS1. Legal bases for payments to the Guarantee Fund from the general budget 31.1. Decisions covered by Transfer DEC34/2004 31.2. Decision covered by Transfer DEC35/2004 32. Guarantee Fund - Management Report at 31 December 2004 42.1. Development of the Fund in 2004 42.2. Situation of the Fund 52.2.1. The Fund's resources at 31 December 2004 52.2.2. The Fund's assets at 31 December 2004 52.3. General and segmental analysis of the Guarantee Fund 52.3.1. Liquidity analysis 52.3.2. General analysis of the results of the Fund 62.4. Analysis by segment 62.4.1. Analysis of money markets operations 62.4.2. Analysis of bond portfolio results 93. Situation of the Guarantee Fund at 31 December 2004 134. Performance of the Guarantee Fund's bond investment portfolio 145. Consolidated financial balance sheet of the Guarantee Fund at 31 December 2004 15LEGAL BASES FOR PAYMENTS TO THE GUARANTEE FUND FROM THE GENERAL BUDGETIn line with Regulation No 2728/94, the provisioning of the Fund follows different rules according to the type of operation covered. In the case of EIB loans, the provisioning of the Fund currently takes place at the beginning of each year, based on the forecast provided by the EIB of total loans to be signed in the respective year. The difference between forecast and realisation is balanced at the end of each year when the Fund is aligned to its target amount. Euratom loans can be provisioned on a forecast basis and are fully provisioned at the latest at the time of the signature of the loans.In the case of macro-financial assistance loans, the provisioning takes place as soon as the Council has adopted the decision to grant macro-financial assistance, i.e. on an individual basis. This procedure is also applied even if the loan is paid out in several tranches over a period of more than one year.Two transfers were made from the guarantee reserve under this procedure in 2004.Decisions covered by Transfer DEC34/2004-  Council Decision of 22 December 1999 (2000/24/EC) as amended granting a Community guarantee to the European Investment Bank against losses under loans for projects outside the Community subject to an overall loan ceiling of EUR 19,460 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 regions (OJ L 9, 13.1.2000, p. 24).-  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 overall ceiling of credits is EUR 100 million (OJ L 292, 09.11.2001, p. 41).-  Council Decision of 29 April 2004 (2004/580/EC) providing macro-financial assistance to Albania and repealing Decision 1999/282/EC (OJ L 261, 06.08.2004, p.116). The loan component of the assistance amounts to EUR 9 million.Decision covered by Transfer DEC35/2004-  Commission Decision C(2004) 891/2 of 30 March 2004 granting a Euratom loan for the completion of unit 2 of the Cernavodă nuclear power plant. The amount of the loan is EUR 223.5 million.-  GUARANTEE FUND - MANAGEMENT REPORT AT 31 DECEMBER 2004[1]Development of the Fund in 2004The total book value[2] of the Fund’s holdings stood at EUR 1,586.0 million at 31 December 2004 as against EUR 1,568.5 million at 31 December 2003, an increase of EUR 17.5 million.Figure 1: Development of holdings in 2004[pic]2.2. The Fund had a surplus of EUR 223.16 million at 31 December 2003. Subsequently, an allocation of EUR 181.875 million was entered on 10 August 2004 by paying the Commission the difference, EUR 41.285 million. Total provisioning to 31 December 2004 amounted to EUR 181.875 million (EUR 161.76 million plus EUR 20.115 million, see section 3.1 in the main Report).2.3. 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 amounted to EUR 58.2 million at 31 December 2004 compared with EUR 63.0 million at 31 December 2003. Bond portfolio income (net of the premium / discount spread) amounted to EUR 48.2 million, representing 83% of the income recorded at 31 December 2004. Money market portfolio income amounted to EUR 11.0 million, or 19% of the total result (see section 3), the rest (-2%) being commission and financial charges.Situation of the FundThe Fund's resources at 31 December 200 4The Guarantee Fund balance decreased by EUR 38.2 million, or 3.2% from EUR 1,177.3 million at 31 December 2003 to EUR 1,139.1 at 31 December 2004.This is explained by the movements shown in the following table:Resources | Situation at | Movements | Situation at |31.12.2003 | in 2004 | 31.12.2004 |Provisioning | 2,355,380,162.91 | 181,875,000.00 | 2,537,255,162.91 |Repayment of surplus | -1,272,850,000.00 | -223,160,000.00 | -1,496,010,000.00 |Activation of guarantee | -473,490,274.02 | -4,370,582.17 | -477,860,856.19 |Recovery of amounts guaranteed | 568,217,579.44 | 7,456,334.33 | 575,673,913.77 |Balance | 1,177,257,468.33 | -38,199,247.84 | 1,139,058,220.49 |Guarantee payments by the Fund during 2004 amounted to EUR 4.4 million. Recovery of funds from Argentina during 2004 amounted to EUR 7.5 million.The Fund's assets at 31 December 2004The Fund’s holdings at 31 December 2004 totalled EUR 1,586.0 million as detailed below. The Fund operates in one currency only, the euro.-  EUR 550.5 million in the monetary portfolio (interbank term deposits)-  EUR 8.8 million in the current accounts-  EUR 1,026.7 million in the investment portfolio (the book value of fixed rate and variable rate securities, see table in section 2.3.1).General and segmental analysis of the Guarantee FundLiquidity analysisThe distribution of the Guarantee Fund’s holdings at 31 December 2004 (book value) was as follows:Segments | Fixed rate investments | Variable rate | TOTAL |Less than 3 months | 3 months to 1 year | 1 to 10 years | Securities |Current accounts | 8,790,146.69 | 8,790,146.69 |Fixed term deposits | 550,500,000.00 | 550,500,000.00 |Securities portfolio | 48,514,426.47 | 87,691,252.91 | 815,770,869.27 | 74,749,234.19 | 1,026,725,782.84 |TOTAL | 607,804,573.16 | 87,691,252.91 | 815,770,869.27 | 74,749,234.19 | 1,586,015,929.53 |Percentage | 38.32% | 5.53% | 51.44% | 4.71% | 100.00% |General analysis of the results of the FundOverall, the Guarantee Fund produced EUR 58.2 million in net revenue, an overall average yield of 3.63%[3] on average capital of EUR 1,577 million.The 3-month Euribid reference rate stood at 1.98%[4] over the same period, giving an overall positive spread of 165 basis points above the reference benchmark (cf. 2.4.1).Investment income at 31 December 2004 was as follows:January – December 2004 (in EUR million) |Interest on interbank term deposits | 10.9 |Interest on securities | 51.0 |Interest on current accounts | 0.1 |Premium / discount spread | (2.8) |Commission and financial charges | (1.0) |Total | 58.2 |Analysis by segmentAnalysis of money markets operationsThe average yield on money-market investments at 31 December 2004 stood at 2.07%, compared with a benchmark average yield of 1.99%.The spread calculated this way is 8 basis points above the 3-month Euribid variable reference rates[5] for 2004, as against a spread of 18 basis points in 2003. This spread does not reflect the margin obtained at the beginning of operations, and this margin is not taken into consideration when calculating yield.PERIOD | YIELD | 3-MONTH EURIBID REFERENCE | SPREAD (basis points) |January – December 2004 | 2.07 % | 1.99%[6] | 8 |Interbank investments at 31 December 2004 produced EUR 11.0 million in interest on capital averaging EUR 546.9 million.Changes in yield and reference rates in 2004The table below shows the rates obtained for short-term money-market investments as compared with the 3-month Euribid reference rate.Figure 2: Yield in relation to the benchmark rate[pic]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, January – March 2004).-  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, March – November 2004).Profile of counterpartiesIn accordance with the agreement between the Community and the EIB on the management of the Guarantee Fund, all the interbank investments have a minimum credit rating of A1.Figure 3:Breakdown of short-term interbank investmentsby type of counterparty at 31 December 2004[pic]Geographical breakdownThe geographical breakdown of the Fund's short-term interbank investments (in terms of average capital) in 2004 is as follows:Figure 4:Short-term interbank investments: geographical distribution of average capital[pic]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.Analysis of bond portfolio resultsThe bond portfolio, seen as a long-term investment portfolio, is made up of euro-denominated securities acquired with the intention of holding them until maturity. At 31 December 2004, the book value of fixed rate securities with a residual period to maturity of less than three months amounted to EUR 48.5 million, between 3 months and one year EUR 87.7 million and between one and 10 years EUR 815.8 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 2004, the nominal value of the investment portfolio was EUR 989.0 million, against a book value of EUR 996.7 million (including the premiums and discounts to be written off).The book yield on the investment portfolio came to 4.58%[7] at 31 December 2004, compared with 4.47% at 31 December 2003. In terms of a Salomon index reference benchmark for fixed-rate securities[8] and the 3-month Euribid for variable-rate securities, the overall spread is positive by 189 basis points compared with the aggregate benchmark of 2.69% (see section 4).The investments in 2004 were respectively in 10 year fixed securities for a total amount of EUR 20 million and in 2 and 7 years FLRN rate securities for a total amount of EUR 15 million. It has to be kept in mind that due to the expected repayment to the budget of an amount of roughly EUR 340 million, only EUR 20 million out of the redeemed EUR 105.5 million were reinvested in fixed rate bonds.Consequently, the global duration of the portfolio decreased to 3.55 years compared with 3.68 years as of end 2003. For information, as of 31 December 2004 the market value of the investment portfolio came to EUR 1,053.8 million compared with a book value of EUR 996.7 million (including premiums/discounts), which gives an unrealised gain of EUR 57.1 million, compared with an unrealised gain of EUR 44.0 million and a book value of EUR 1,124.7 million at 31 December 2003.German government bond rates in 2004 (source Bloomberg):31.12.2003 | 31.03.2004 | 30.06.2004 | 30.09.2004 | 31.12.2004 |Bund 3y | 2.86 | 2.48 | 3.15 | 2.82 | 2.62 |Bund 5y | 3.50 | 3.09 | 3.57 | 3.32 | 3.03 |Bund 7y | 3.96 | 3.48 | 3.98 | 3.63 | 3.36 |Bund 10y | 4.29 | 3.93 | 4.32 | 3.99 | 3.68 |Market value compared with book value in 2004Figure 5: Market value compared with book value in 2004[pic]At 1 January 2004, a total of EUR 165.7 million of reimbursements (nominal value) on the securities portfolio were scheduled for the year, split as follows:-  EUR 105.5 million for the fixed rate, and-  EUR 60.2 million for the variable rate.Breakdown of the investment portfolio between fixed rate and variable rate securitiesFigure 6:Breakdown of the portfolio between fixed-rate and variable-rate securitiesat 31 December 2004[pic]Redemption profile of investment portfolio (nominal value)Figure 7: Investment portfolio: Redemption profile at 31 December 2004[pic]The latest final maturity date for fixed-rate securities is 25 October 2014.Profile of issuersAll 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;-  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 at 31 December 2004 is as follows:Figure 8: Investment portfolio: Profile of issuers at 31 December 2004[pic]SITUATION OF THE GUARANTEE FUND AT 31 DECEMBER 2004[pic] PERFORMANCE OF THE GUARANTEE FUND'S BOND INVESTMENT PORTFOLIOThe 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.[pic]* Salomon Index | EGBI 1-3 years | 45.0% |EGBI 3-5 years | 45.0% |3 M Eurodeposit | 10.0% |** Average weighted by actual days in months. |Consolidated financial balance sheet of the Guarantee Fund at 31 December 200 4[pic][1] Report prepared by the EIB.[2] Total assets less other assets (see section 3).[3] The basis for calculating the overall yield is act/360.[4] 1.98% is a linear mean of the 3-month Euribid since the beginning of the year.[5] The treasury spread measures the difference between the actual interbank investment rate obtained and the benchmark variable, which is the 3-month Euribid rate for that day.[6] 1.99% is a weighted mean of the 3-month Euribid since the beginning of the year.[7] The basis for calculating the yield of the investment portfolio is act/365.[8] This benchmark will be adjusted once the new approach will be 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.