Report from the Commission - Annual report from the Commission on the Guarantee Fund and its management in 2007 {SEC(2008)1938}
Date: 2008-05-29
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)

EN 

EN 

   EN 

 
 
COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.5.2008 
COM(2008) 327 final 

REPORT FROM THE COMMISSION 

Annual report from the Commission 
 on the Guarantee Fund and its management in 2007 

{SEC(2008)1938} 

EN 

   EN 

 
 
 
  
 
 
 
REPORT FROM THE COMMISSION 

Annual report from the Commission 
 on the Guarantee Fund and its management in 2007 

{SEC(2008)1938} 

EN 

2 

   EN 

 
 
TABLE OF CONTENTS 

1. 

2. 

2.1 

2.2 

2.3 

Legal base..................................................................................................................... 4 

Position of the Fund at 31 December 2007.................................................................. 5 

Financial analysis ......................................................................................................... 5 

Accounting presentation............................................................................................... 6 

Pre-consolidated financial Statement of the Guarantee Fund at 31 December 2007... 6 

2.3.1  Guarantee Fund Pre-consolidated balance sheet.......................................................... 8 

2.3.2  Guarantee Fund Pre-consolidated Economic Outturn Account ................................. 11 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

4. 

4.1. 

4.2. 

Payment from or into the Fund .................................................................................. 12 

Legal base for payment to the Guarantee Fund from the general budget .................. 12 

Payment from or to the general budget in the course of the financial year ............... 12 

Interest from investments of the Fund's liquid assets ................................................ 12 

Recovery from defaulting debtors.............................................................................. 14 

The Fund's liabilities .................................................................................................. 14 

Default payments ....................................................................................................... 14 

EIB’s remuneration .................................................................................................... 14 

EN 

3 

   EN 

 
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”).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 
in  Brussels  and  on 
25 November 1994 in Luxembourg (“the Agreement”).  

the  EIB  on  23 November 1994 

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  2007  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. 

1 

SEC(2007) 

EN 

4 

   EN 

 
                                                 
2. 

POSITION OF THE FUND AT 31 DECEMBER 2007 

2.1 

Financial analysis 

The  position  of  the  Fund  is  presented  in  accordance  with  International  Financial 
Reporting Standards (IFRS) at the close of the 2007 financial year. The Fund totalled 
EUR 1,152,973,945.02 (see Section 3 of the Annex: Statement of Financial position 
of the Fund at 31 December 2007, provided by EIB). This is the sum, since the Fund 
was established, of all: 

budget payments to the Fund; 

successive yearly net results; 

recoveries of payments made by the Fund for 
the defaults; 

minus  EIB  management  fees  corresponding 
to the payment to be made in 2008; 

commission  received  on  late  recovery  in 
2002; 

adjustment due to the application of IFRS for 
the  valuation  of  the  Fund’s  portfolio  (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; 

successive  repayments  to  the  budget  of  the 
surplus in the Fund; 

less  the  repayment  to  the  budget  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); 

less  the  repayment  to  the  budget  in  2007, 
representing 9% of the outstanding operations 
as of 1 January 2007 granted to Bulgaria and 
Romania after joining the EU at this date (See 
in  Section 1  the  2004  amendment  of  the 
Fund’s Regulation); 

+ EUR 2,799,914,500.00

+ EUR 628,715,763.42

+ EUR 575,673,913.77

- EUR 678,951.39

+ EUR 5,090,662.91

- EUR 3,627,413.49

- EUR 477,860,856.19

- EUR 1,775,870,000.00

- EUR 338,831,402.07

- EUR 260,940,124.72

Financial  position  of 
December 2007. 

the  Fund  at  31 

EUR 1,152,973,945.02

EN 

5 

   EN 

 
After  the  deduction  of  accruals  in  account  payables  of  EUR 708,901.39,  thereof 
EUR 678,951.39  management  fees  (EIB's  remuneration),  and  the  deduction  of 
EUR 125.750.000,00 corresponding to the surplus established in 2007 for the budget 
20082,  the  total  of  the  net  balance  sheet  of  the  Fund  (Fund's  resources)  at 
31 December 2007 amounts to EUR 1,026,515,043.63. 

Article 3  of  the  amended  Regulation3  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 countries plus 
accrued  interest  totalled  EUR 12,427,584,330.13  at  31 December 2007,  of  which 
EUR 125,845,866.67  were  accounted  for  accrued  interest.  The  ratio  between  the 
Fund's resources of EUR 1,026,515,043.63 and outstanding capital liabilities within 
the  meaning  of  the  amended  Regulation  was  8.26%.  Since  this  is  lower  than  the 
target amount of 9% of the total guaranteed outstanding amount (rounded amount of 
EUR 1,118.48 million), a payment from the general budget of the European Union to 
the Fund has to be made, as provided for in the second paragraph of Article 2 of the 
amended Regulation in 2007. The amount to be inserted in 2008 as a provisioning in 
the Preliminary Draft Budget of 2009 is EUR 91,960,000.00. 

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,  an  amount  of  EUR 260,940,124.72  was 
repaid  on 
14 February 2007 to the budget following the amended Regulation. 

and  Romania 

amounted 

loans 

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 2007 

financial  Statement 

of 

the  Guarantee  Fund 

at 

The  total  amount  of  the  pre-consolidated  balance  sheet  is  EUR 1,153,957,868.29. 
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. 

2 

3 

The  amount  of  EUR 125,750,000.00  was  repaid  on  the  31  January  2008  to  the  general  budget  of  the 
European Union, as provided for in the third paragraph of Article 2 of the amended Regulation. 
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. 

EN 

6 

   EN 

 
                                                 
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). 

EN 

7 

   EN 

 
2.3.1  Guarantee Fund Pre-consolidated balance sheet 

Balance sheet: Assets (EUR) 

2007 

2006 

Current assets 

Short-term receivables 

983,923.27

1,099,797.60

Others 

983,923.27

1,099,797.60

Short-term Investments 

903,713,224.50

939,964,332.03

AFS Portfolio – cost 

893,521,021.50

909,631,292.30

AFS Portfolio – actuarial difference 

-5,928,251.48

-7,298,412.75

AFS Portfolio – adjustment to fair value 

-3,895,732.16

14,654,734.60

AFS Portfolio - accruals 

20,016,186.64

22,976,717.60

AFS Portfolio - impairment 

Cash and cash equivalents 

249,260,720.52

439,733,359.86

Current accounts 

1,232,834.25

1,158,007.44

Short-term deposits - nominal 

246,600,000.00

436,500,000.00

Accrued interests on short-term deposits 

1,427,886.27

2,075,352.42

Other cash equivalent - cost 

Accrued 
equivalents 

interests  on  other 

cash 

Total Current Assets 

1,153,957,868.29

1,380,797,489.49

TOTAL 

1,153,957,868.29

1,380,797,489.49

EN 

8 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet: Liabilities (EUR) 

2007 

2006 

A. EQUITY 

Capital (Guarantee Fund) 

424,272,973.21

685,213,097.93

Payment from the budget 

390,982,973.21

559,463,097.93

(surplus to be paid to the budget) 

33,290,000.00

125,750,000.00

Reserves 

-3,627,413.49

14,996,561.86

time  application  –  Fair  value 

First 
reserve 

268,318.67

341,827.26

Change in fair value of AFS assets 

-3,895,732.16

14,654,734.60

Accumulated surplus / deficit 

679,821,791.09

627,856,153.68

Results brought forward 

679,821,791.09

627,856,153.68

Economic result of the year 

52,761,227.92

51,965,637.41

Total Equity 

1,153,228,578.73

1,380,031,450.88

B. CURRENT LIABILITIES 

Accounts payables 

729,289.56

766,038.61

Others 

729,289.56

766,038.61

Total current liabilities 

766,038.61

TOTAL 

1,153,957,868.29

1,380,797,489.49

EN 

9 

   EN 

 
 
 
 
 
 
 
 
 
 
 
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 2007 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. 

EN 

10 

   EN 

 
2.3.2  Guarantee Fund Pre-consolidated Economic Outturn Account 

GF – Consolidated Economic Outturn Account 
(EUR) 

2007 

2006 

Financial operations revenues 

53,711,135.24 

52,981,320.04

Interest income 

Interest income on cash and cash equivalents 

10,018,308.25 

11,443,127.48

Interest income on AFS assets 

40,792,525.60 

41,538,192.56

Other interest income 

Exchange gains 

Realised gains on sale of AFS assets 

2,900,301.39 

Reversal of impairment losses on AFS assets 

Other financial income 

Financial operations expenses 

-949,907.32 

-1,015,682.63

Interest charges 

Interest charges on cash and cash equivalents 

Exchange losses 

-115,874.33 

-128,000.52

Realised losses on sale of AFS assets 

Impairment losses on AFS assets 

Other financial charges 

Thereof: Management fees 

-834,032.99 

-887,682.11

-835,014.05 

-714,719.38

SURPLUS FROM NON OPERATING ACTIVITIES 

52,761,227.92 

51,965,637.41

SURPLUS FROM ORDINARY ACTIVITIES 

Extraordinary gains 

Extraordinary losses 

SURPLUS FROM EXTRAORDINARY ITEMS 

ECONOMIC RESULT OF THE YEAR 

52,761,227.92 

51,965,637.41

EN 

11 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note to the Pre-consolidated Economic Outturn Account: 

"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. 

PAYMENT FROM OR INTO THE FUND 

3.1. 

Legal base for payment to the Guarantee Fund from the general budget 

In line with the amended Regulation No 2728/94, the provisioning of the Guarantee 
Fund (the “Fund”) follows a new provisioning rule. In this context, one of the main 
advantages  of  this  system  is  its  simplicity  and  its  certainty  about  the  budgetary 
requirements  as  all  types  of  operations  covered  (EIB,  MFA,  Euratom  loans)  are 
known and follow the same rule of 9% of the amount of loans and guaranteed loans 
outstanding for the calculation of the target amount. 

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 is provided through a 
budget line under Heading 4 (External Relations). 

3.2. 

Payment from or to the general budget in the course of the financial year 

On  30 January 2007,  the  Council  adopted  an  amendment  to  the  Regulation  No 
2728/94. 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. 

of 

the 

basis 

guaranteed 

31.12.2006 

outstanding 

operations 
On 
(EUR 11,025.07million),  an  amount  of  EUR 125.75  million  corresponding  to  the 
2006 surplus was inserted in 2007 to a special heading in the statement of revenue in 
the general budget of the European Union of the year 2008. This amount was paid in 
one  transaction  from  the  Fund  to  the  budget  on  31.01.2008.  This  surplus  is 
exceptional  as  it  is  mainly  explained  by  the  first  time  application  of  the  new 
provisioning  mechanism  which  takes  into  account  the  effective  loans  disbursed 
during the previous year. 

3.3. 

Interest from investments 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. One third of the Fund must 
be  invested  in  short-term  investments  (up  to  one  year).  These  investments  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 

4 

OJ C139, 14.06.2006, p. 1. 

EN 

12 

   EN 

 
                                                 
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  providing  the 
required liquidity, a minimum of 18% (corresponding to twice the provisioning rate 
of the Fund) is kept in monetary investments, particularly bank deposits. 

At  the  end  of  2007,  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 reached. 

During 2007, the portfolio achieved a total return of 3.099%. 

The performance of the portfolio was slightly inferior to its benchmark (see annex in 
paragraph 1.5 "Performance" for details). At the end of 2007, the under-performance 
amounted  to  16.5  basis  points.  This  performance  is  explained  by  the  impact  of  the 
so-called “sub-prime” crisis which caused a strong increase in market volatility and, 
more  importantly,  credit  spreads  to  widen  substantially  which  impacted  negatively 
the  performance  of  the  Guarantee  Fund  portfolio  vis-à-vis  the  benchmark.  The 
under-performance of the Fund was particularly strong in July and November 2007 
when  investments  in  Eastern  European  bond  markets  and  covered  bonds  not 
contained  in  the  benchmark  index  suffered  from  the  sub-prime  crisis.  In  December 
2007 an outperformance led to a partial correction of the under-performance. 

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. 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 competitive return and 
to avoid the concentration of risk. 

In 2007, interest income on cash and cash equivalents, on the Fund current accounts 
and on securities totalled EUR 53,711,135.24, broken down as follows: 

– 

– 

From  deposits  and  current  accounts:  EUR 10,018,308.25;  this  represents  the 
situation  at  31 December 2007  including  interest  received  on  bank  deposits 
EUR 10,614,035.07 and changes in accrued interest EUR 647,466.15 in 2006. 
The current accounts amounted to EUR 51,739.33 comprising interest recorded 
on the current accounts. 

this  amount 

From  securities  portfolio:  EUR 40,792,525.60; 
includes 
EUR 44,712,208.37  of  interest  on  securities,  and  changes  in  accrued  interest 
(EUR 2,960,531.24)  at  31  December  2007.  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 959,151.53 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. 

EN 

13 

   EN 

 
3.4. 

Recovery from defaulting debtors 

No recovery occurred in 2007. 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 2007. 

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 2007 was fixed at EUR 678,951.39 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 2008. 

EN 

14 

   EN