Report from the Commission - Annual Report from the Commission on the Guarantee Fund and its Management in 2004 {SEC(2005) 807}
Date: 2005-06-21
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.6.2005 
COM(2005) 262 final 

REPORT FROM THE COMMISSION 

Annual Report from the Commission 
on the Guarantee Fund and its Management in 2004 

{SEC(2005) 807} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

4.3. 

Legal bases ................................................................................................................... 3 

Position of the Fund at 31 December 2004.................................................................. 3 

Payments into the Fund................................................................................................ 4 

Payments from the general budget in the course of the financial year ........................ 4 

Interest from financial investment of the Fund's liquid assets ..................................... 5 

Recovery from defaulting debtors................................................................................ 6 

The Fund's liabilities .................................................................................................... 6 

Default payments ......................................................................................................... 6 

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

Foreign exchange losses............................................................................................... 7 

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1. 

LEGAL BASES  

(EC,  Euratom)  No 2728/94  of  31 October 1994 

Council  Regulation 
(“the 
Regulation”)  set  up  a  Guarantee  Fund  for  external  actions  in  order  to  repay  the 
Community's  creditors  in  the  event  of  default  by  beneficiaries  of  loans  granted  or 
guaranteed  by  the  Community  (OJ  L 293,  12.11.1994,  p. 1).  The  Regulation  was 
amended by the Council Regulation (EC, Euratom) No 1149/99 of 25 May 1999 (OJ 
L 139,  2.6.1999,  p. 1) and the Council  Regulation (EC, Euratom) No 2273/2004 of 
22 December 2004 (OJ L 396, 31.12.2004, p. 28) (“the amended Regulation”). 

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 of 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 the year 2004 can be found in section 2 of the 
Commission Staff Working Paper (“the Annex”)1. 

In  addition,  Article 7  of  the  amended  Regulation  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 May of the 
following year. 

2. 

POSITION OF THE FUND AT 31 DECEMBER 2004 

At the close of the 2004 financial year, the Fund totalled EUR 1,612,856,213.44 (see 
section 3 of the Annex). This is the sum, since the Fund was established, of all: 

– 

– 

– 

– 

– 

– 

budget payments to the Fund (EUR 2,532,164,500.00); 

successive yearly net results (EUR 473,032,495.02); 

late repayments from non-member countries (EUR 575,673,913.77); 

debts corresponding to the repayments not made to the EIB (EUR 765,497.93); 

commission received on late recovery in 2002 (EUR 5,090,662.91); 

less  calls  on  the  Fund's  resources  (EUR 477,860,856.19)  and  successive 
repayments to the budget of the surplus in the Fund (EUR 1,496,010,000.00). 

the  deduction  of  accruals  (EIB's  remuneration), 

After 
31 December 2004 amounts to EUR 1,612,090,715.51. 

the  Fund 

total  at 

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SEC(2005) 807 

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The  total  amount  of  the  consolidated  balance  sheet  is  EUR 1,614,117,863.19.  This 
includes the total amount of the Fund plus the arrears covered by the Fund and the 
accruals of interests on late payments (for details see section 5 of the Annex). 

Article 3  of  the  Regulation  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. 

The  amended  Regulation  stipulates  that  operations  towards  accession  countries 
covered by the Guarantee Fund remain covered by the Communities guarantee after 
the date of accession. However, from that date, they cease to be external actions of 
the  Communities  and  are  covered  directly  by  the  general  budget  of  the  European 
Union and no longer by the Guarantee Fund. 

Therefore, outstanding lending and loan guarantee operations for third countries plus 
unpaid interest due totalled EUR 12,068,132,585.66 at 31 December 2004, of which 
EUR 144,107,751.62 was accounted for by interest due but not yet paid. 

Consequently,  an  amount  of  EUR 338,831,402.07  was  repaid  to  the  budget  on 
10 January 2005,  representing  9%  of  the  outstanding  operations  granted  to  the  new 
Member States at 1 May 2004 (EUR 3,764,793,356.32). 

the 

ratio 

Fund's 

between 

The 
- 
EUR 338,831,402.07)  and  outstanding  capital  liabilities  within  the  meaning  of  the 
amended Regulation was 10.55%. Since this is higher than the target amount of 9%, 
a repayment from the Fund to the general budget of the European Union had to be 
made,  as  provided  for  in  the  third  paragraph  of  Article 3  of  the  Regulation.  The 
amount to be repaid to the budget in 2005 came to EUR 187,130,000.00. 

(EUR 1,612,090,715.51 

resources 

3. 

PAYMENTS INTO THE FUND 

3.1. 

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

The legal bases for the provisioning arrangements are described in section 1 of  the 
Annex. 

The  Council  Regulation  (EC)  No 2040/2000  of  26 September 2000  (OJ L 244, 
29.9.2000, p. 27) concerning budgetary discipline authorised the entry in the general 
budget  of  a  reserve  for  loan  and  loan  guarantee  operations.  This  item,  which  was 
allocated appropriations of EUR 221 million in 2004, is used for endowing the Fund 
by transferring amounts into the budget item for payments into the Fund. 

In line with the legal bases, two transfers totalling EUR 181,875,000.00 to endow the 
Guarantee Fund were adopted by the budgetary authority in 2004. 

– 

Transfer  DEC  34/20042:  EUR 161,760,000.00:  this  first  transfer  was  for 
the  Council  Decisions  of 
payments 

respect  of 

the  Fund 

into 

in 

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SEC(2004) 716 final. 

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22 December 1999,  6 November 2001  and  29 April 2004  in  accordance  with 
the arrangements set out in the Annex to the Regulation. 

– 

Transfer  DEC  35/20043:  EUR 20,115,000.00:  this  second  transfer  was  for  a 
payment  into  the  Fund  in  respect  of  a  loan  operation  adopted  by  the 
Commission on 30 March 2004. 

The decisions covered by these transfers are given in section 1 of the Annex. 

Both transfers were paid under the mechanism for offsetting against the repayment of 
the Fund’s surplus which took place on 10 August 2004. 

In line with the needs identified in the Comprehensive Report on the functioning of 
the  Guarantee  Fund4,  the  Commission  adopted  an  amendment  to  the  Regulation  of 
the Guarantee Fund to improve the rules of the provisioning mechanism, i.e. the rules 
that determine how the Fund’s assets are brought in line with the target amount of the 
Fund5. 

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 23/25 November 1994, 
amended  by  Supplementary  Agreement  No 1  of  17/23 September 1996  and 
Supplementary  Agreement  No 2  of  26  April/8 May 2002.  By  Supplementary 
Agreement No 2, the investment principles were changed in 2002 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  helped  to  improve  the 
Fund's yield while maintaining a prudent liquidity level. 

In 2004, the new portfolio structure decided in 2002 was fully implemented and an 
additional liquidity reserve was set aside in order to cover an important extraordinary 
payment to the budget expected to take place in the second half of 2004 or very early 
in  2005  (EUR 338,831,402.07,  related  to  the  accession  of  the  ten  new  Member 
States). 

3 
4 
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SEC(2004) 717 final. 
COM(2003) 604 final. 
COM(2005) 130 final. 

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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 & Poor’s or Fitch rating. The investments made with them 
are governed by rules to ensure a good spread and to avoid the concentration of risk. 

In  2004,  interest  on  deposits,  the  Guarantee  Fund  current  accounts,  and  securities 
totalled EUR 61,950,402.49, broken down as follows: 

– 

– 

– 

including 

EUR 10,855,766.08; 

represents 
received 

deposits: 
at 
this 
31 December 2004 
deposits 
interest 
(EUR 11,318,130.39)  and  changes  in  accrued  interest  (-EUR 462,364.31)  in 
2004. 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 2004 
(EUR 738,069.03) is reduced by the accrued interest entered in the accounts for 
2003 but received in 2004 (EUR 1,200,433.34). 

the 
on 

situation 

bank 

current  accounts:  EUR 53,933.68  comprising  interest  recorded  on  the  current 
account. 

this 

amount 

portfolio: 

EUR 51,040,702.73; 

securities 
includes 
EUR 50,411,967.55  of  interest  on  securities,  EUR 628,735.18  of  interest 
received on Commercial Paper, and EUR 26,102,214.88 of accrued interest at 
31  December  2004.  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  Fund's 
liquid  assets.  From 
the 
EUR 2,845,532.15 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). 

figure  must,  however,  be  subtracted 

this 

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

3.3. 

Recovery from defaulting debtors 

Late repayments by defaulting countries on operations where the Fund has honoured 
the guarantees have been paid into the Fund. The running total is now amounted to 
EUR 575,673,913.77  at  31  December  2004  as  one  net 
repayment  of 
EUR 7,456,334.33 has been received during the year. 

4. 

THE FUND'S LIABILITIES 

4.1. 

Default payments 

Two calls on the Fund took place in 2004, for a total amount of EUR 4,370,582.17 
(see section 2.2.1 of the Annex). 

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4.2. 

EIB remuneration 

The  second  Supplementary  Agreement  to  the  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. 

The Bank's remuneration for 2004 was fixed at EUR 765,497.93 and was entered in 
the  profit-and-loss  account  and  as  accruals  (liabilities)  on  the  balance  sheet.  The 
remuneration will be paid to the EIB in the first quarter of 2005. 

4.3. 

Foreign exchange losses 

The  Guarantee  Fund  realized  a  loss  of  EUR 1,260,433.70  further  to  a  foreign 
exchange  transaction  of  USD 10,117,515.47  (see  section  3.3)  in  the  context  of  a 
recovery from a defaulted loan. 

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