Report from the Commission - Annual Report from the Commission on the Guarantee Fund and its Management in 2006 {SEC(2007) 869}
Date: 2007-06-28
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 28.5.2007 
COM(2007) 362 final 

REPORT FROM THE COMMISSION 

Annual Report from the Commission 
on the Guarantee Fund and its Management in 2006 

{SEC(2007) 869} 

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TABLE OF CONTENTS 

1. 

2. 

2.1 

2.2 

2.3 

Legal base .................................................................................................................... 3 

Position of the Fund at 31 December 2006.................................................................. 3 

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

Accounting presentation............................................................................................... 5 

Pre-consolidated financial Statement of the Guarantee Fund at 31 December 2006... 5 

2.3.1  Guarantee Fund Pre-consolidated balance sheet.......................................................... 6 

2.3.2  Guarantee Fund Pre-consolidated Economic Outturn Account ................................... 9 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

Payments into the Fund.............................................................................................. 10 

Payments from the general budget in the course of the financial year ...................... 10 

Interest from financial investment of the Fund's liquid assets ................................... 11 

Recovery from defaulting debtors.............................................................................. 12 

The Fund's liabilities .................................................................................................. 12 

Default payments ....................................................................................................... 12 

EIB’s remuneration .................................................................................................... 12 

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1. 

LEGAL BASE  

(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),  the  Council  Regulation  (EC,  Euratom) 
No 2273/2004 of 22 December 2004 (OJ L 396, 31.12.2004, p. 28) and last amended 
by  Council  Regulation  (EC,  Euratom)  No 89/2007  of  30 January 2007  (OJ  L 22, 
31.1.2007,  p. 1)  (“the  amended  Regulation”).  This  last  amendment  will  apply  on 
1 January 2007. 

In  accordance  with  Article 6  of  the  Regulation,  the  Commission  entrusted  the 
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 an 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  2006  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 to 
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 2006 

2.1 

Financial analysis 

The  position  of  the  Fund  is  presented  in  accordance  with  International  Financial 
Reporting Standards (IFRS) at the close of the 2006 financial year. The Fund totalled 
EUR 1,379,697,691.89 (see Section 3 of the Annex: Statement of Financial position 
of the Fund at 31 December 2006, provided by EIB). This is the sum, since the Fund 
was established, of all 

– 

– 

– 

budget payments to the Fund EUR 2,799,914,500.00; 

successive yearly net results EUR 575,869,592.23; 

recoveries  of  payments  made  by 
EUR 575,673,913.77; 

the  Fund 

for 

the  defaults 

1 

SEC(2007) 

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– 

– 

– 

– 

– 

– 

minus EIB management fees for an amount of EUR 714,719.38; corresponding 
to the payment to be made in 2007; 

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

adjustment  due  to  the  application  of  IFRS  for  the  valuation  of  the  Fund’s 
portfolio  EUR 14,996,561.86  (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 1,775,870,000.00); 

to 

the  budget  of 

the  surplus 

in 

the  Fund 

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

After  the  deduction  of  accruals  in  account  payables  of  EUR 743,249.38,  thereof 
EUR 714,719.38 management fees (EIB's remuneration), the total of the net balance 
sheet of the Fund at 31 December 2006 amounts to EUR 1,378,954,442.51. 

interest  on 

At  31 December 2006,  outstanding  lending  and  loan  guarantee  operations  plus 
accrued 
to 
to  Bulgaria 
EUR 2,899,334,719.06. As these countries became members of the European Union 
on 1st January 2007, as of the date, an amount of EUR 260,940,124.72 was repaid on 
the 14 February 2007 to the budget following the amended Regulation. 

and  Romania 

amounted 

loans 

Article 3  of  the  amended  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. 

resources  of  EUR 1,118,014,317.79 

Therefore,  outstanding  lending  and  loan  guarantee  operations  for  third  countries2 
plus  accrued  interest  totalled  EUR 11,025,065,532.58  at  31 December 2006,  of 
which EUR 109,809,066.54 were accounted for accrued interest . The ratio between 
the  Fund's 
- 
EUR 260,940,124.72)  and  outstanding  capital  liabilities  within  the  meaning  of  the 
amended Regulation was 10.1%. Since this is higher than the target amount of 9% of 
the total guaranteed outstanding amount (rounded amount of 992.26 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 amended Regulation 
in  2007.  The  amount  to  be  inserted  in  2007  as  a  surplus  in  the  Preliminary  Draft 
Budget of 2008 is EUR 125,750,000.00. 

(EUR 1,378,954,442.51 

2 

The  amended  Regulation  stipulates  that  operations  towards  accession  countries  covered  by  the  Fund 
remain covered by the Community 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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2.2 

Accounting presentation 

Since the Commission decided to present its accounts according to new accounting 
rules inspired by IPSAS / IFRS principles, the pre-consolidated financial statements 
of  the  Fund  have  been  prepared  according  to  these  principles  as  explained  in  the 
Annex. 

2.3 

Pre-consolidated 
31 December 2006 

financial  Statement 

of 

the  Guarantee  Fund 

at 

The  total  amount  of  the  pre-consolidated  balance  sheet  is  EUR 1,380,797,489.49. 
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. 

The major changes in the presentation of accounts are explained in the notes in order 
to  reconcile  the  figures  with  the  EIB  financial  statement  presented  in  the  Annex 
(paragraph 3.2). 

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2.3.1  Guarantee Fund Pre-consolidated balance sheet 

Balance sheet: Assets (EUR) 

2006 

2005 

Current assets 

Short-term receivables 

1,099,797.60

1,227,798.12

Others 

1,099,797.60

1,227,798.12

Short-term Investments 

939,964,332.03

1,008,639,934.02

AFS Portfolio – cost 

909,631,292.30

946,662,502.30

AFS Portfolio – actuarial difference 

-7,298,412.75

-8,860,547.41

AFS Portfolio – adjustment to fair value 

14,654,734.60

46,565,266.11

AFS Portfolio - accruals 

22,976,717.60

24,272,713.02

AFS Portfolio - impairment 

Cash and cash equivalents 

439,733,359.86

316,024,023.23

Current accounts 

1,158,007.44

1,582,089.98

Short-term deposits - nominal 

436,500,000.00

313,500,000.00

Accrued interests on short-term deposits 

2,075,352.42

941,933.25

Other cash equivalent - cost 

Accrued 
equivalents 

interests  on  other 

cash 

Total Current Assets 

1,380,797,489.49

1,325,891,755.37

TOTAL 

1,380,797,489.49

1,325,891,755.37

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Balance sheet: Liabilities (EUR) 

2006 

2005 

A. EQUITY 

Capital (Guarantee Fund) 

685,213,097.93

650,303,097.93

Payment from the budget 

559,463,097.93

557,573,097.93

(surplus to be paid to the budget) 

125,750,000.00

92,730,000.00

Reserves 

14,996,561.86

46,981,944.72

time  application  –  Fair  value 

First 
reserve 

341,827.26

416,678.61

Change in fair value of AFS assets 

14,654,734.60

46,565,266.11

Accumulated surplus / deficit 

627,856,153.68

577,197,865.26

Results brought forward 

627,856,153.68

577,197,865.26

Economic result of the year 

51,965,637.41

50,658,288.42

Total Equity 

1,380,031,450.88

1,325,141,196.33

B. CURRENT LIABILITIES 

Accounts payables 

766,038.61

750,559.04

Others 

766,038.61

750,559.04

Total current liabilities 

766,038.61

750,559.04

TOTAL 

1,380,797,489.49

1,325,891,755.37

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Note to the balance sheet: 

•  The "short-term receivable others" refers to the amounts of calls on the Fund. This amount 
includes the capital, the interests and the penalties due to the Community Budget following 
the intervention of the Fund further to the activation of a guarantee. 

•  The difference in "accumulated surplus" in equity compared to the financial position of the 
Fund  presented  in  the  paragraph  3.3  of  the  Annex  is  explained  by  the  successive 
repayments of the calls and penalties to the Fund. 

•  The "account payables others" in 2006 include the EIB management commission, the audit 
fees, the accrual of closing accounts audit fees and the accrual of the recovery fees due to 
EIB following the payment of the penalty fees due to the Fund. 

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2.3.2  Guarantee Fund Pre-consolidated Economic Outturn Account 

GF – Consolidated Economic Outturn Account 
(EUR) 

2006 

2005 

Financial operations revenues 

52,981,320.04 

51,555,876.17

Interest income 

Interest income on cash and cash equivalents 

11,443,127.48 

6,280,520.69

Interest income on AFS assets 

41,538,192.56 

44,158,957.25

Other interest income 

Exchange gains 

-88,004.16

54,152.53

Realised gains on sale of AFS assets 

0.00 

1,150,249.86

Reversal of impairment losses on AFS assets 

Other financial income 

Financial operations expenses 

-1,015,682.63 

-897,587.75

Interest charges 

Interest charges on cash and cash equivalents 

Exchange losses 

-128,000.52 

Realised losses on sale AFS assets 

Impairment losses on AFS assets 

Other financial charges 

Thereof: Management fees 

-887,682.11 

-897,587.75

-714,719.38 

-702,497.47

SURPLUS FROM NON OPERATING ACTIVITIES 

51,965,637.41 

50,658,288.42

SURPLUS FROM ORDINARY ACTIVITIES 

Extraordinary gains 

Extraordinary losses 

SURPLUS FROM EXTRAORDINARY ITEMS 

ECONOMIC RESULT OF THE YEAR 

51,965,637.41 

50,658,288.42

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Note to the Pre-consolidated Economic Outturn Account: 

•  The adjustment in 2005 related to "other interest income" is due to the change in valuation 

of the penalties to receive. 

•  The "exchange gains" in 2005 refer to valuation of "other receivables". 

"Other financial charges" include EIB management commission, the audit fees, the accrual of 
closing  accounts  audit  fees  and  the  accrual  of  the  recovery  fees  due  to  EIB  following  the 
payment of the outstanding penalty fees due to the Fund. 

3. 

PAYMENTS INTO THE FUND 

3.1. 

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

The  legal  base  for  the  provisioning  arrangements  is  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 
appropriations of EUR 229 million in 2006 were allocated, is used for endowing the 
Fund by transferring amounts to the budget item for payments to the Fund. 

In line with the legal base, one transfer totalling EUR 127,640,000.00 to endow the 
Fund was adopted by the budgetary authority in 2006. 

– 

Transfer  DEC20/20063:  EUR 127,640,000.00:  this  transfer  was  for  payments 
into  the  Fund  in  respect  of  the  Council  Decisions  of  22 December 1999, 
the 
in 
6 November 2001 
arrangements set out in the Annex to the Regulation. 

and  22 December 2004, 

accordance  with 

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

The  transfer  of  EUR 127,640,000.00  was  paid  under  the  mechanism  for  offsetting 
against the repayment of the Fund’s surplus of EUR 92,730,000.00. Consequently, a 
net amount of EUR 34,910,000.00 was paid to the Fund on 31 July 2006. 

On  30 January 2007,  the  Council  adopted  an  amendment  (See  Section 1  on  Legal 
Base) which will apply from 1 January 2007. The main objective of this amendment 
is to improve the efficiency of the use of budgetary means by provisioning the Fund 
on the basis of observed amounts of guaranteed loans outstanding. 

According to the Interinstitutional Agreement between the European Parliament, the 
Council  and  the  Commission  on  budgetary  discipline  and  sound  financial 
management4,  the  amount  available  for  financing  of  the  Fund  will  be  carried  out 

3 
4 

SEC(2006) 646 final. 
OJ C139, 14.06.2006, p. 1. 

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through a  budget line  under  Heading 4 (External Relations) and not, as in the past, 
through a dedicated Reserve5. 

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. 

At  the  end  of  2006,  the  target  structure  of  the  portfolio  as  refined  in  2005,  i.e.  an 
equal  distribution  of  investments  between  the  2  and  10  year  maturity  was  almost 
implemented. During 2007 the full implementation is programmed.  

The  performance  of  the  portfolio  was  superior  to  its  benchmark  (see  annex  in 
paragraph 2.5.2 "Performance" for details). At the end of 2006, the out-performance 
amounted to 6.45 basis points. 

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 higher return and to avoid the concentration of risk. 

In 2006, interest income on cash and cash equivalents, on the Fund current accounts 
and on securities totalled EUR 52,981,320.04, broken down as follows: 

– 

Deposits  and  current  accounts:  EUR 11,443,127.48;  this  represents  the 
situation  at  31 December 2006  including  interest  received  on  bank  deposits 
EUR 10,272,574.00  and  changes  in  accrued  interest  EUR 1,133,419.17  in 

5 

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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2005.  The  current  accounts  amounted  to  EUR 37,134.31  comprising  interest 
recorded on the current accounts.  

– 

this 

amount 

portfolio: 

EUR 41,538,192.56; 

Securities 
includes 
EUR 44,781,061.69  of  interest  on  securities,  and  changes  in  accrued  interest 
(EUR 1,295,995.14)  at  31  December  2006.  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  mandating  the  EIB  to 
manage the Fund's liquid assets. From this figure must, however, be subtracted 
the  EUR 1,946,873.99  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 2006. 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 2006. 

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 2006 was fixed at EUR 714,719.38 and was entered in 
the  profit-and-loss  account  and  as  accruals  (liabilities)  on  the  balance  sheet.  The 
remuneration was paid to the EIB in February 2007. 

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