Report from the Commission - Annual Report from the Commission on the Guarantee Fund and its management in 2005 {SEC(2006) 891}
Date: 2006-07-10
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.7.2006 
COM(2006) 366 final 

REPORT FROM THE COMMISSION 

Annual Report from the Commission 
on the Guarantee Fund and its Management in 2005 

{SEC(2006) 891} 

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TABLE OF CONTENTS 

1. 

2. 

2.1 

2.2 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

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

Position of the Fund at 31 December 2005.................................................................. 3 

Financial analysis ......................................................................................................... 3 

Accounting presentation............................................................................................... 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’s remuneration ...................................................................................................... 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  ("the  Fund")  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 this annual status report on the Fund and its management including the 
revenue  and  expenditure  account,  "statement  of  financial  performance",  and  the 
financial  statement  for  the  Fund  for  the  preceding  year,  "statement  of  financial 
position  of  the  Fund".  Further  details  of  the  report  covering  the  year  2005  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 2005 

2.1 

Financial analysis 

The  position  of  the  Fund  is  presented  in  accordance  with  International  Financial 
Reporting Standards (IFRS) at the close of the 2005 financial year. The Fund totalled 
EUR 1,324,663,957.25 (see Section 3 of the Annex: Statement of Financial position 
of the Fund at 31 December 2005, provided by EIB). This is the sum, since the Fund 
was established, of all 

– 

– 

– 

– 

– 

budget payments to the Fund EUR 2,672,274,500.00; 

successive yearly net results EUR 523,763,636.64; 

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

debts corresponding to the repayments not made to the EIB EUR 711,557.47; 

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

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SEC(2006) 891 

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– 

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– 

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adjustment  due  to  the  application  of  IFRS  for  the  valuation  of  the  Fund’s 
portfolio  EUR  46,981,944.72  (See  item  "Reserves"  in  the  Liabilities  of  the 
Guarantee Fund Balance Sheet in Section 3 of the Annex); 

less calls on the Fund's resources (EUR 477,860,856.19); 

successive 
repayments 
(EUR 1,683,140,000.00); 

to 

the  budget  of 

the  surplus 

in 

the  Fund 

and an exceptional repayment to the budget of EUR 338,831,402.07 was made 
on  10  January  2005,  representing  9%  of  the  outstanding  operations  as  of 
1 May 2004  granted  to  the  new  Member  States  (See  in  Section 1  the  last 
amendment of the Fund’s Regulation). 

the  deduction  of  accruals  EUR 725,117.47, 

After 
thereof  EUR 702,497.47 
management fees (EIB's remuneration), the Fund total at 31 December 2005 amounts 
to EUR 1,323,938,839.78. 

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. 

Therefore,  outstanding  lending  and  loan  guarantee  operations  for  third  countries2 
plus  unpaid  interest  due  totalled  EUR 13,680,125,069.70  at  31 December 2005,  of 
which EUR 125,823,921.72 were accounted for by interest due but not yet paid. 

The  ratio  between  the  Fund's  resources  EUR 1,323,938,839.78  and  outstanding 
capital  liabilities  within  the  meaning  of  the  amended  Regulation  was  9.68%.  Since 
this  is  higher  than  the  target  amount  of  9%  of  the  total  guaranteed  outstanding 
amount  (rounded  amount  of  1,231.21  EUR  million),  a  repayment  from  the  Fund  to 
the general budget of the European Union has 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 
2006 is EUR 92,730,000.00.  

2.2 

Accounting presentation 

The  European  Communities  are  committed  to  undertake  a  major  change  to  their 
accounting framework with the objective to produce its financial statements based on 
accrual  accounts  in 2005. In  the framework of  this  modernisation,  the  Commission 
decided to present its accounts according to new accounting rules inspired by IPSAS 
/IFRS principles. 

Consequently, pre-consolidated financial statements of the Fund have been prepared 
in order to comply with these principles. 

2 

The  amended  Regulation  stipulates  that  operations  towards  accession  countries  covered  by  the  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 Fund. 

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The  total  amount  of  the  pre-consolidated  balance  sheet  is  EUR 1,325,891,755.37. 
This includes the total amount of the Fund plus the arrears covered by the Fund, the 
accruals  of  interests  on  late  payments  and  other  accounting  accruals  in  order  to 
produce a full set of financial statements for the Fund at year-end to be consolidated 
in the EU consolidated balance sheet (for details see section 4 of the Annex). 

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  loans  and  guaranteed  operations.  This  item,  to  which  were 
allocated appropriations of EUR 223 million in 2005, is used for endowing the Fund 
by transferring amounts to the budget item for payments to the Fund. 

In line with the legal bases, one transfer totalling EUR 140,110,000.00 to endow the 
Fund was adopted by the budgetary authority in 2005. 

– 

Transfer DEC 11/20053: EUR 140.110.000,00: this transfer was for payments 
into  the  Fund  in  respect  of  the  Council  Decisions  of  22 December 1999, 
6 November 2001 and 22 December 2004 as well as the Commission Decision 
C(2004)2817/3,  in  accordance  with  the  arrangements  set  out  in  the  Annex  to 
the Regulation. 

The decisions covered by this transfer are given in Section 1 of the Annex. 

The transfer  was paid under  the mechanism for offsetting against the repayment of 
the Fund’s surplus EUR 187.130.000,00 which took place on 15 July 2005. 

On  12 April 2005,  the  Commission  adopted  a  Proposal  for  a  Council  Regulation 
amending Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for 
external actions4 to change the Fund’s provisioning mechanism. The main objective 
of  this  proposal  is  to  improve  the  efficiency  of  the  use  of  budgetary  means. 
According  to  the  proposal,  the  Fund  would  be  provisioned  ex-post  on  the  basis  of 
observed  amounts  of  guaranteed  loans  outstanding.  At  the  time  of  finalizing  this 
report, the Council had not yet adopted this Commission proposal. 

According to the Commission Communication on the Financial Perspectives 2007 - 
20135, the amount available for financing of the Fund will not, in theory, be limited 
in the future6 by a budgetary mechanism as the funding of the Fund will be carried 

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SEC(2005) 479 final. 
COM(2005) 130. 
COM(2004) 487 of 14.7.2004. 
Budgetary discipline will however be ensured as: 
- for Macro-Financial Assistance loans, individual Council decisions are needed; 
- for Euratom and EIB guaranteed loans, multiannual ceilings are approved by the Council. 

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out through a budget line under Heading 4 (External Relations) and not, as at present, 
through a dedicated Reserve. 

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, 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  2005,  a  gradual  approach  was  agreed  for  long-term  investments  with  a  view  to 
implement the target structure, i.e. an equal distribution of investments between the 2 
and  10  year  maturity.  To  this  end,  interest  rate  levels  (entry  points)  have  been 
decided  which  would  trigger  long-term  investments  in  those  maturities  where  the 
actual amounts are below the target. During the course of 2005, not all levels have 
been  reached  and  therefore,  the  implementation  of  the  target  structure  will  be 
finalised in 2006. 

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 2005, interest income on cash and cash equivalents, on the Fund current accounts 
and on securities totalled EUR 50,439,477.94, broken down as follows: 

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including 

Deposits and current accounts: EUR 6,280,520.69; this represents the situation 
at  31 December 2005 
received  on  bank  deposits 
EUR 5,907,583.42  and  changes  in  accrued  interest  EUR 203,864.22  in  2005. 
The current accounts amounted to EUR 37,503.59 comprising interest recorded 
on  the  current  accounts.  Commercial  paper  amounted  to  EUR 160,016.91  of 
interest  received  and  changes  in  accrued  interest  (EUR 28,447.45)  at 
31 December 2005. 

interest 

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– 

this 

amount 

portfolio: 

EUR 44,158,957.25; 

Securities 
includes 
EUR 48,997,994.99  of  interest  on  securities,  and  changes  in  accrued  interest 
(EUR 1,961,071.32)  at  31  December  2005.  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  this  figure  must,  however,  be 
subtracted  the  EUR 2,877,966.42  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 

No recovery occurred in 2005. An amount of USD 1,448,433.44 relating to non paid 
penalty interest remains to be recovered by the Fund. 

4. 

THE FUND'S LIABILITIES 

4.1. 

Default payments 

The Fund was not called for default payments in 2005. 

4.2. 

EIB’s 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 2005 was fixed at EUR 702,497.47 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 2006. 

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