Commission staff working document - Annex to the Report from the Commission - Annual Report from the Commission on the Guarantee Fund and its Management in 2007 {COM(2008)327}
Date: 2008-05-29
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)

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2008/ECFIN/022 

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.5.2008 
SEC(2008)1938 

COMMISSION STAFF WORKING DOCUMENT 

Annex to the  

Report from the Commission 

Annual Report from the Commission 
on the Guarantee Fund and its Management in 2007 

{COM(2008)327} 

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TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

Guarantee Fund - Management Report at 31 December 2007..................................... 4 

Development of the Fund in 2007................................................................................ 4 

Situation of the Fund.................................................................................................... 5 

1.2.1.  The Fund's resources at 31 December 2007................................................................. 5 

1.2.2.  The Fund's assets at 31 December 2007 ...................................................................... 5 

1.3. 

General and segmental analysis of the Fund................................................................ 6 

1.3.1.  Liquidity analysis ......................................................................................................... 6 

1.3.2.  General analysis of the results of the Fund .................................................................. 6 

1.4. 

Analysis by segment .................................................................................................... 7 

1.4.1.  Analysis of money markets operations ........................................................................ 7 

1.4.2.  Analysis of bond portfolio results ................................................................................ 8 

1.5. 

Performance and interest rate risk analysis................................................................ 13 

1.5.1 

Interest rate risk.......................................................................................................... 14 

1.5.2 

Performance ............................................................................................................... 16 

2. 

2.1 

2.2 

2.3 

2.3 

3. 

3.1 

3.2 

Statement of Financial Position of the Fund at 31 December 2007........................... 17 

Economic Outturn Account (Statement of Financial Performance) for the year ended 
31 December 2007 ..................................................................................................... 18 

Balance Sheet (Statement of Financial Position) as at 31 December 2007 ............... 19 

Statement of changes in equity for the year ended 31 December 2007 ..................... 21 

Cash Flow Statement as at 31 December 2007.......................................................... 22 

Notes to the Financial Statements .............................................................................. 23 

General disclosures .................................................................................................... 23 

Significant accounting policies .................................................................................. 23 

3.2.1  Basis of preparation.................................................................................................... 23 

3.2.2 

Significant accounting and judgments and estimates................................................. 23 

3.2.3 

Summary of significant accounting policies .............................................................. 24 

3.2.3.1  Foreign currency translation ...................................................................................... 24 

3.2.3.2  Cash and cash equivalents.......................................................................................... 24 

3.2.3.3  Short-term investments .............................................................................................. 24 

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3.2.3.4  Taxation...................................................................................................................... 25 

3.2.3.5  Capital ........................................................................................................................ 25 

3.3 

Financial Risk Management....................................................................................... 25 

3.3.1 

Interest Rate and Liquidity Risks............................................................................... 25 

3.3.2  Credit Risk ................................................................................................................. 29 

3.4 

3.5 

3.6 

3.7 

3.8 

3.9 

Short-term Investments – Available For Sale Assets................................................. 31 

Cash and Cash Equivalents ........................................................................................ 32 

Current Liabilities ...................................................................................................... 33 

Financial operations revenues .................................................................................... 33 

Financial operations expenses.................................................................................... 34 

Subsequent events ...................................................................................................... 34 

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1. 

GUARANTEE FUND - MANAGEMENT REPORT AT 31 DECEMBER 20071 

1.1. 

Development of the Fund in 2007 

The total market value of the Guarantee Fund’s (the “Fund”) holdings (excluding accrued 
interest)  stood  at  EUR  1  131.5  million  at  31  December  2007  as  against  EUR  1  354.7 
million at 31 December 2006, a decrease of EUR 223.2 million. 

)
o
r
u
e
s
n
o

i
l
l

mi

(

2006
2007

1400.0

1375.0

1350.0

1325.0

1300.0

1275.0

1250.0

1225.0

1200.0

1175.0

1150.0

1125.0

1100.0

1075.0

Jan

Mar

May

Jul

Sep

Nov

Figure 1: Development of holdings in 2007 & 2006 

The  decrease  of  the  Fund's  total  market  value  was  mainly  due  to  the  payment  of  an 
amount of € 260,940,124.72 which was paid to 
the Community budget on 14 February 
2007. The amount corresponds to 9% (the Fund's target rate) of the outstanding amount 
of  guaranteed  loans  to  two  countries  which  became  EU  Member  States  on  1  January 
2007 and therefore are no longer covered by the Guarantee Fund which is limited to non-
EU Member States. 

The net operating result amounted to € 52.9  million at 31 December 2007 compared with 
€ 52.1 million at 31 December 2006. Interest inco me on AFS assets (net of the premium / 
discount  spread)  amounted  to  €  40.8  million,  representing  77  %  of  the  total  result 
recorded at 31 December 2007. Interest income on cash & cash equivalents amounted to 
€ 10.0 million, or 19% of the total result. In 200 7 the sale of AFS assets generated a net 
realised gain of € 2.9 million, representing 5%  of the total result of the year. The rest (-
1%) reflects commissions and financial charges. 

1 

Report prepared by the EIB. 

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1.2. 

Situation of the Fund  

1.2.1.  The Fund's resources at 31 December 2007 

The Fund balance decreased by EUR 260.9 million, or 33% from EUR 788.1 million at 
31 December 2006 to EUR 527.2 million at 31 December 2007. 

This  is  explained  by  the  movements  since  the  Fund  was  established  shown  in  the 
following table: 

Resources 

Situation at  

Movements 

Situation at 

31/12/2006 

in 2007 

31/12/2007 

Provisioning 

Repayment of surplus 

Activation of guarantee 

Recovery of amounts guaranteed 

Repayment of Funds (9%) 

+

- 

- 

+

-

2,805,005,162.91

0.00 

2,805,005,162.91

(1,775,870,000.00)

0.00 

(1,775,870,000.00)

(477,860,856.19)

0.00 

(477,860,856.19)

575,673,913.77

0.00 

575,673,913.77

(338,831,402.07)

(260,940,124.72) 

(599,771,526.79)

Balance 

788,116,818.42

(260,940,124.72) 

527,176,693.70

An amount of € 260,940,124.72 was paid to th e Community budget on 14 February 2007 
caused by the accession of two new EU Member states to the EU at the date of 1 January 
2007. This amount corresponds to 9% (the Fund's target rate) of the outstanding amount 
of  guaranteed  loans  to  two  countries  which  became  EU  Member  States  on  1  Janauary 
2007 and therefore are no longer covered by the Guarantee Fund which is limited to non-
Member States. 

1.2.2.  The Fund's assets at 31 December 2007 

The  Fund’s  holdings  at  31  December  2007  excluding  accrued  interest  totalled  
EUR  1  131.5  million  as  detailed  below.  The  Fund  operates  in  one  currency  only,  the 
Euro: 

EUR 246.6 million in the monetary portfolio (nominal value of interbank term deposits); 
EUR 1.2 million in the current accounts; 
EUR 883.7 million in the Available For Sale (AFS) investment portfolio (the market 
value of fixed rate and variable rate securities (excluding accrued interest), see table in 
section 3.1). 

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1.3. 

General and segmental analysis of the Fund 

1.3.1.  Liquidity analysis 

The  distribution  of  the  Fund’s  holdings  at  31 December 2007  (market  value  excluding 
accrued interest) was as follows: 

Fixed rate investments 

Segments 

Less than 3 
months 
EUR 

3 months to 1 
year 
EUR 

1 to 10 years 

EUR 

Variable rate 
securities 
EUR 

TOTAL 
EUR 

Current accounts 

1,232,834.25 

Short-term  
deposits-nominal 

246,600,000.00 

0.00 

0.00 

0.00 

0.00 

0.00 

1,232,834.25 

0.00 

246,600,000.00 

AFS portfolio 

25,484,880.00 

83,951,180.00 

703,003,924.86 

71,257,053.00 

883,697,037.86 

TOTAL 

273,317,714.25 

83,951,180.00 

703,003,924.86 

71,257,053.00 

1,131,529,872.11 

Percentage 

24.15% 

7.42% 

62.13% 

6.30% 

100.00% 

1.3.2.  General analysis of the results of the Fund 

Overall, the Fund produced EUR 52.9 million in net revenue. Investment income at 31 
December 2007 was as follows: 

Investment income at 31 December 2007 was as follows: 

Interest income on cash & cash equivalents 

Interest income on AFS assets 

Net realised gain on sale of AFS assets 

Commission and financial charges 

Total 

January – December 2007 

(in million EUR) 

10.0 

40.8 

2.9 

(0.8) 

52.9 

The performance of the Fund portfolio was monitored on a marked to market basis. Over 
2007, the portfolio delivered a 3.099% MTM return, under-performing its benchmark by 
16.5bps. 

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1.4. 

Analysis by segment 

1.4.1.  Analysis of money markets operations 

Money-market investments amounted to EUR 246.6 million at 31 December 2007, to be 
compared with EUR 436.5 million a year before. 

The  EUR  189.9  million  decrease  mainly  results  from  the  repayment  to  the  Community 
budget  of  the  reflow  due  to  the  EU  enlargement  to  Bulgaria  and  Romania.  This 
repayment occurred in early February 2007. 

•  Evolution of money-market rates in 2007 

While the ECB reference rate remained unchanged at 4% during the year (after two hikes 
of  25bps  each  in  March  and  June),  the  money  markets  environment  was  extremely 
challenging, notably in the second half of the year after the explosion of the crisis in US 
sub-prime mortgage market resulted by the end of the summer in a full-blown worldwide 
liquidity crisis. Market participants became extremely cautious and unwilling to lend to 
each  other  except  for  very  short-term  maturities.  As  a  result,  market  spreads  widened 
abnormally and EURIBOR fixings rose high above Central Banks rates. The increase of 
the  short-term  money  market  rates  benefited  the short-term  portfolio  which  invested 
in tenors  up  to  3  month.  However,  the  increasing  volatility  of  money  market  rates 
resulting from the liquidity and credit crunch forced the major Central Banks to organize 
during the last quarter of 2007 an injection of massive amounts of liquidity in a largely 
successful operation to force downwards the price of short-dated liquidity. 

The table below shows the evolution of the one- and three-month Euribid reference rates 
(i.e. Euribor -12.5bp). 

Money market rates (% )

Euibid 1M

Euribid 3M

5

4.8

4.6

4.4

4.2

4

3.8

3.6

3.4

3.2

3

01/01/2007

02/04/2007

02/07/2007

01/10/2007

31/12/2007

Figure 2: Evolution of Money Market rates during 2007 

•  Profile of counterparties 

In  accordance  with  the  agreement  between  the  Community  and  the  EIB  on  the 
management  of  the  Fund,  all  banks  with  which  deposits  are  placed  should  have  a 

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7 

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minimum  short-term  credit  rating  of  A1  (Moody's),  or  equivalent.  The  breakdown, 
including accrued interest, is as follows: 

Aa3
41%

A1
30%

Aa2
21%

Aa1
8%

Figure 3: Short-term interbank investments by type of counterparty at 31 December 2007 

•  Geographical breakdown 

Regarding the diversification of counterpart location, the EIB is pursuing its objective of 
a  better  geographical  distribution  throughout  the  countries  of  the  European  Union  by 
placing  the  short-term  deposits  in  a  number  of  banks  located  in  the  main  EU  financial 
centers. This allows to ensure competitive returns.  

1.4.2.  Analysis of bond portfolio results 

The  bond  portfolio,  seen  as  a  long-term  investment  portfolio,  is  made  up  of  euro-
denominated  securities  initially  acquired  with  the  intention  of  holding  them  until 
maturity. Under IFRS (IAS), these securities are classified in the Financial Statements as 
Available  For  Sale  (AFS).  At  31  December  2007,  the  market  value  (excluding  accrued 
interest)  of  fixed  rate  securities  with  a  residual  period  to  maturity  of  less  than  three 
months  amounted  to  EUR  25.5  million,  between  3  months  and  one  year  EUR  84.0 
million and between one and 10 years EUR 703.0 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  using  the 
effective interest rate method as specified under IFRS. 

At 31 December 2007, the nominal value of the investment portfolio (including floating 
rate notes) was EUR 889.1 million, against a market value of EUR 883.7 million. 

The  global  (modified)  duration  of  the  bond  portfolio  increased  over  2007  to  reach  3.5 
years  at  the  end  of  the  year.  As  of  31  December  2007  the  market  value  (excluding 
accrued interest) of the investment portfolio came to EUR 883.7 million compared with a 
book  value  of  EUR 887.6  million  (including  premiums/discounts),  which  gives  an 
unrealised  loss  of  EUR 3.9  million,  compared  with  an  unrealised  gain  of  EUR 14.7 
million  and  a  market  value  (excluding  accrued  interest)  of  EUR 917.0  million  at  31 
December 2006. 

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During 2007 the euro area 2- to 10-year yield curve spread steepened by 32 basis points 
from 5 basis points to 37 basis points. The movement occurred as a result of long-term 
yields increasing more than short-term yields as shown in figure 4. 

1Y 

2Y 

3Y 

4Y 

5Y 

6Y 

7Y 

8Y 

9Y 

10Y 

Figure 4: Euro area yield curve steepening during 2007 using German government benchmark bonds 
(source Bloomberg) 

In  accordance  with  the  2007  investment  strategy  a  total  nominal  amount  of  EUR  125 
million was invested in 6- to 10-year fixed coupon bonds. 

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Jan 31 

Feb 30  Mar 30  Apr 30  May 31 

Jun 29 

Jul 31 

Aug 31 

Sep 28  Oct 31 

Nov 30  Dec 31 

Figure 5: 2007 Graph of 10-year Bund YTD yield evolution with investment dates 
(source Bloomberg) 

At 1 January 2007, a total of EUR 112.6 million of reimbursements (nominal value) on 
the securities portfolio were scheduled for the year, split as follows: 

EUR 107.5 million for the fixed rate, and 

EUR 5.1 million for the variable rate. 

In addition, during 2007 seven positions of the fixed rate securities portfolio with a total 
of EUR 101.5 million (nominal value) were sold. The sale generated a net realised gain 
of  EUR  2.9  million.  The  sales  were  effected  in  line  with  the  agreed  2007  strategy  that 
included  the  proposal  for  switch  trades.  The  switches  were  executed  in  order  to  more 
closely align the actual portfolio maturity structure with its target structure. 

•  Breakdown  of  the  investment  portfolio  between  fixed  rate  and  variable  rate 

securities 

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Variable rate
8%

Fixed Rate
92%

Figure 6: Breakdown of the investment portfolio between fixed and variable rate securities at 31 December 2007 

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•  Redemption profile of investment portfolio (nominal value) 

)
o
r
u
e
s
n
o

i
l
l
i

m

(

Variable rate

Fixed Rate

140

120

100

80

60

40

20

0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Figure 7: Investment portfolio: Redemption profile at 31 December 2007 

The latest final maturity date for fixed rate securities is 15 May 2017. 

•  Profile of issuers 

All 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. 

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The profile of issuers at 31 December 2007 is as follows: 

Other Financial Institutio ns Aaa
4.6%

P ublic Companies A aa
12.4%

Special P urpose Vehicle A aa
9.6%

P ublic Companies A 2
1.1%

M ember States B aa1
1.1%

M ember States A 3
0.4%

M ember States A2
13.8%

M ember States A 1
8.3%

M ember States A a3
9.2%

M ember States A a1
8.1%

Figure 8: Investment portfolio: Profile of issuers at 31 December 2007 

B anks A aa
20.1%

B anks A a1
0.6%

Go vernment Bo dy A aa
0.4%

M DB s A aa
0.6%

M ember States A aa
9.8%

1.5. 

Performance and interest rate risk analysis 

The performance of the Fund is monitored on a marked-to-market (MTM) basis against a 
composite index. This index is the result of the combination of the following sub-indices: 

– 

– 

– 

– 

Euribid 1M for money-market operations 

Euribid 3M for floating rate notes and fixed rate bond with less than one 
year to maturity 

IBOXX EUR Sovereign indices for fixed rate bonds issued by sovereign 
(or similar) issuers, split by maturity buckets  

IBOXX  EUR  Corporate  indices  for  fixed  rate  bonds  issued  by  corporate 
(or similar) issuers, split by maturity buckets 

Index weightings are based on portfolio composition and are reviewed every month. The 
table below shows the average weightings over 2007: 

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Bucket (years) 

Performance Benchmark 
Sector 

Instrument 

Percentage of Total 
portfolio (2007 average)

0-1 

1-3 

3-5 

5-7 

7-10 

Total 

1 m 

3 m 

sovereign 

corporate 

sovereign 

corporate 

sovereign 

corporate 

sovereign 

corporate 

Money Markey 

20.7% 

FRN and Fixed Rate Bonds 

Fixed 

Rate 

Bonds 

14.3% 

16.0% 

1.1% 

14.5% 

1.7% 

11.6% 

1.2% 

17.2% 

1.7% 

100% 

1.5.1 

Interest rate risk 

The interest rate risk sensitivity of the MTM value of the portfolio mainly stems from its 
fixed rate exposure. A 1bp increase of interest rates reduces the value of the portfolio by 
EUR  319,548,  of  which  EUR  317,356  is  related  to  the  fixed  rate  bond  exposure.  The 
global duration of the fund arose, at the end of 2007, at 2.78 years. 

GF Sub- Portfolios 

Market Value 
(excluding accrued 
interest) 

Modified 
Duration 
(Years) 

Floating Rate Notes  

71,257,053 

Fixed Rate Bonds 

812,439,990 

Money Market Deposits

246,633,625 

Cash account 

1,939,7832 

0.17 

3.83 

0.04 

0 

Interest Rate 
Exposure 

(+/-1bp) 

-/+ 1,226 

-/+ 317,356 

-/+ 965 

0 

2 

The EUR 1.9 million “cash account” balance reported in this table does not include any payments relating to 
commissions or fees. This explains why it does not match the EUR 1.2 million total balance of the “current 
account”  balance  reported  in  section  2.2.  The  “cash  account”  balance  is however  reset  at  the  beginning  of 
each year to match the total balance of the current accounts 

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Total GF 

1,132,270,451 

2.78 

-/+ 319,548 

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1.5.2 

Performance 

Over 2007, the portfolio delivered a 3.099% MTM return. The evolution of the portfolio 
return and relative return vis-à-vis its benchmark is presented in the following table. 

Portfolio 

Out-performance 

Market Value  

(including accrued 
interest) 

Monthly  
 return  
(absolute return in 
%) 

YTD  
 return  
(absolute return in 
%) 

Monthly 
Excess Return  
(in %) 

YTD  
Excess Return 
(in %) 

31/01/2007 

1,381,068,956 

0.1168 

0.1168 

-0.0070 

-0.0070 

28/02/2007 

1,127,213,443 

0.5957 

0.7132 

-0.0078 

-0.0148 

31/03/2007 

1,127,246,625 

0.0029 

0.7162 

30/04/2007 

1,128,410,186 

0.1032 

0.8202 

31/05/2007 

1,123,220,782 

-0.4599 

0.3565 

0.0033 

0.0333 

-0.0108 

-0.0115 

0.0220 

0.0109 

30/06/2007 

1,121,356,368 

-0.1660 

0.1899 

-0.0517 

-0.0410 

31/07/2007 

1,130,086,981 

0.7786 

0.9700 

-0.0799 

-0.1214 

31/08/2007 

1,139,405,709 

0.8246 

1.8026 

0.0013 

-0.1211 

30/09/2007 

1,141,908,780 

0.2197 

2.0262 

0.0265 

-0.0944 

31/10/2007 

1,147,863,797 

0.5215 

2.5583 

-0.0059 

-0.1009 

30/11/2007 

1,154,364,400 

0.5663 

3.1391 

-0.1262 

-0.2310 

31/12/2007 

1,153,911,897 

-0.0392 

3.0987 

0.0639 

-0.1648 

Throughout  the  year,  the  evolution  of  medium  and  long-term  rates  resulted  in  rather 
volatile  portfolio  monthly  returns.  Bond  yields  peaked  at  mid-year  before  starting  to 
decline  when  the  effects  of  the  “sub-prime”  crisis  emerged  in  Europe.  This  evolution 
during  the  second  half  of  the  year  was  accompanied  by  a  credit  spread  movement  that 
negatively  impacted  the  relative  performance  of  the  Guarantee  Fund.  In  particular, 
unusual  drops  of  the  relative  return  were  observed  in  July  and  November.  These  drops 
are  mainly  attributable  to  the  combination  of  (1)  the  investments  in  Eastern  European 
government  bonds  and  covered  bonds  not  contained  in  the  Eurozone  Sovereign  Iboxx 
benchmarks, and (2) a widening of the yield spreads of the above-mentioned bonds vs the 
major  European  government  bonds  (Germany,  France,  Italy  and  Spain).  A  partial 
recovery  was  however  observed  in  December,  limiting  the  2007  under-performance  to 
16.5 bp. 

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2. 

STATEMENT OF FINANCIAL POSITION OF THE FUND AT 31 DECEMBER 2007 

The  Funds’  financial  statements  have  been  prepared  by  the  EIB  in  accordance  with 
International  Financial  Reporting  Standards  (IFRS) and the accounting rules adopted by the 
European  Commission,  in  particular  “Accounting  rule  11  –  Financial  assets  and  liabilities”, 
dated September 20043. These financial statements are presented in Euro. This is the financial 
statement  for  the  Fund's  assets  managed  by  the  EIB.  The  annual  accounts  of  the  Guarantee 
Fund  for  the  year  ending  of  31st  December  2007,  have  been  audited  and  certified  by  an 
Independent Auditor. 

3

This is based on the revised standards IAS 32 and 39 as issued by the IASB on 18 December 2003 and consequently, does not 
integrate the carved out provisions as set out in the version of IAS 39 endorsed by the European Commission on 19 November 
2004. 

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2.1 

Economic Outturn Account (Statement of Financial Performance) for the year 
ended 31 December 2007 

Financial operations revenues 

31.12.2007 

31.12.2006 

EUR 

EUR 

Notes

3.7 

Interest income 

50,810,833.85 52,981,320.04

Interest income on cash and cash equivalents 

10,018,308.25 11,443,127.48

Interest income on AFS assets 

40,792,525.60

41,538,192.5

Exchange gains 

2,900,301.39

0.00

Realised gains on sale of AFS assets 

Reversal of impairment losses on AFS assets 

Other financial income 

Financial operations expenses 

3.8 

Interest charges 

Interest charges on cash and cash equivalents 

Exchange losses 

Realised losses on sale of AFS assets 

Impairment losses on AFS assets 

Other financial charges 

Thereof: Management fees 

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

 0.00

 0.00

0.00

 0.00

 0.00

 0.00

 0.00

(836,434.05)

(903,894.45)

(678,951.39)

(714,719.38)

SURPLUS FROM NON OPERATING ACTIVITIES

52,874,701.19 52,077,425.59

SURPLUS FROM ORDINARY ACTIVITIES 

52,874,701.19 52,077,425.59

Extraordinary gains 

Extraordinary losses 

SURPLUS FROM EXTRAORDINARY ITEMS 

0.00

0.00

0.00

0.00

0.00

ECONOMIC RESULT OF THE YEAR 

52,874,701.19 52,077,425.59

The notes refer to the Notes to the Financial Statements. 

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2.2 

Balance Sheet (Statement of Financial Position) as at 31 December 2007 

ASSETS 

CURRENT ASSETS 

Notes

31.12.2007 

31.12.2006 

EUR 

EUR 

Short-term Investments 

3.2.3.3

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

22,976,717.88

AFS Portfolio – impairment  

0.00

0.00

Total Short-term Investments 

903,713,224.50 939,964,332.03

Cash and Cash Equivalents 

3.2.3.2

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 equivalents – cost 

Accrued interests on other cash equivalents

0.00

0.00

0.00

0.00

Total Cash and cash equivalents 

249,260,720.52 439,733,359.86

Total Current Assets  

1,152,973,945.02 1,379,697,691.89

TOTAL 

1,152,973,945.02 1,379,697,691.89

EN 

19 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 LIABILITIES 

Notes

31.12.2007 

31.12.2006 

EUR 

EUR 

A. EQUITY 

Capital (Guarantee Fund) 

527,176,693.70 788,116,818.42

Reserves 

First Time application – Fair value 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 

Results brought forward 

575,841,062.23 523,763,636.64

Economic result of the year 

52,874,701.19

52,077,425.59

Total Equity 

   1,152,265,043.63 1,378,954,442.51

B. CURRENT LIABILITIES 

Accounts Payable 

3.6 

Sundry Payables 

Others 

0.00

0.00

708,901.39

743,249.38

Total Current Liabilities  

708,901.39

743,249.38

TOTAL 

   1,152,973,945.02 1,379,697,691.89

The notes refer to the Notes to the Financial Statements. 

EN 

20 

   EN 

 
  
 
 
  
 
 
 
  
  
  
 
 
  
  
  
 
 
 
 
  
 
  
2.3 

Statement of changes in equity for the year ended 31 December 2007 

Equity 

(EUR) 

Reserves 

Capital 

Fair value reserve

Changes in fair 
value of AFS  

Accumulated Surplus 
/ Deficit 

Economic Result of 
the year 

Total 

Balance as of 01.01.2006 

753,206,818.42

416,678.61

46,565,266.11

473,032,495.02

50,731,141.62

1,323,952,399.78

Fair value adjustment – AFS reserve 

Fair value reserve 

0.00 

0.00 

Payment from the European Union 

34,910,000.00

Result of the year 2005 

Result of the year 2006 

0.00

0.00 

0.00 

(31,910,531.51)

(74,851.35)

0.00 

0.00

0.00 

0.00 

0.00 

0.00

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

(31,910,531.51)

(74,851.35)

34,910,000.00

50,731,141.62

(50,731,141.62)

0.00

0.00 

52,077,425.59

52,077,425.59

Balance as of 31.12.2006 

788,116,818.42

341,827.26

14,654,734.60

523,763,636.64

52,077,425.59

1,378,954,442.51

Fair value adjustment – AFS reserve 

Fair value reserve 

0.00 

0.00 

Payment to the European Union 

(260,940,124.72)

Allocation of the Economic result of 
the year 2006 

Result of the year 2007 

0.00 

0.00 

0.00

(18,550,466.76)

(73,508.59)

0.00 

0.00 

0.00 

0.00 

0.00 

0.00

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

(18,550,466.76)

(73,508.59)

0.00 

(260,940,124.72)

52,077,425.59

(52,077,425.59)

0.00

0.00 

52,874,701.19

52,874,701.19

Balance as of 31.12.2007 

527,176,693.70

268,318.67

(3,895,732.16)

575,841,062.23

52,874,701.79

1,152,265,043.63

EN 

21 

EN 

 
  
2.3 

Cash Flow Statement as at 31 December 2007 

Year to 2007 

Year to 2006 

EUR 

EUR 

Investing activities 

Interest  received  (current  accounts,  deposits,  commercial

10,018,308.25

11,443,127.48

  Management fee paid during the year 

  Bank charges paid during the year 

(714,719.38)

(702,497.47)

(156,062.66)

(169,705.07)

   Purchase of investments - AFS portfolio 

(200,355,630.00) (115,177,650.00)

   Proceeds of investments - AFS portfolio 

214,063,079.41 148,625,000.00

Interest received - AFS bond portfolio 

44,712,208.37

44,781,061.69

  Realised gains of AFS assets 

 Net Cash Flows from investing activities 

2,900,301.39

0.00

70,467,485.38

88,799,336.63

Financing activities

   Capital payment from European Union

0.00

34,910,000.00

   Capital repaid to European Union

   Repayments of financial liabilities 

   Proceeds of financial liabilities 

   Extraordinary items 

(260,940,124.72)

0.00

0.00

0.00

0.00

0.00 

0.00 

0.00 

 Net Cash Flows from financing activities

(260,940,124.72)

34,910,000.00

Net increase/(decrease) in cash and cash equivalents 

(190,472,639.34) 123,709,336.63

 Cash and cash equivalents at beginning of financial year 

439,733,359.86 316,024,023.23

 Cash and cash equivalents at end of financial year 

249,260,720.52 439,733,359.86

EN 

22 

   EN 

 
 
 
 
  
 
3. 

NOTES TO THE FINANCIAL STATEMENTS 

3.1 

General disclosures 

The rules and principles for the management of the Guarantee Fund (the “Fund”) are laid out 
in the Convention between the European Commission (the “Commission”) and the European 
Investment Bank (the “EIB”) dated 25 November 1994 and the subsequent amendments dated 
17/23 September 1996 and 8 May 2002. 

The main principles of the Fund, as extracted directly from the Convention, are as follows: 

•  The Fund will operate in one single currency being Euro (EUR). It will exclusively invest 

in this currency in order to avoid any exchange rate risk. 

•  Management of the Fund will be based upon the traditional rules of prudence adhered to 
for financial activities. It will have to pay particular attention to reducing the risks and to 
ensuring that the  managed assets have  a sufficient  degree  of liquidity  and transferability, 
taking into account the commitments to which the Fund will have. 

•  The  Fund  will  be  able  to  use  all  the  hedging  instruments  against  the  market  and  interest 

risks, already used by the Portfolio Division of the EIB. 

•  The portfolio management will be based on the optimal duration and on the best possible 
allocation  between  short-term  and  long-term  investments,  for  consideration  of  both 
liquidity and return. 

3.2 

Significant accounting policies 

3.2.1 

Basis of preparation 

The Fund’s financial statements have been prepared in accordance with the accounting rules 
adopted  by  the  Accounting  Officer  of  the  European  Commission,  in  particular  “Accounting 
rule  114  –  Financial  assets  and  liabilities”,  dated  December  2004  and  updated  in  October 
2006. 

3.2.2 

Significant accounting and judgments and estimates 

The  preparation  of  financial  statements  in  conformity  with  the  accounting  rules  adopted  by 
the  Accounting  Officer  of  the  European  Commission  requires  the  use  of  certain  critical 
accounting estimates. It also requires management to exercise its judgment in the process of 
applying the Fund’s accounting policies. The area involving a higher degree of judgment or 
complexity,  or  areas  where  assumptions  and  estimates  are  significant  to  the  financial 
statements, are disclosed. 

The most significant use of judgments and estimates are as follows: 

4 

This is based on the revised standards IAS 32 and 39 as issued by the IASB on 18 December 2003 and consequently, does not 
integrate the carved out provisions as set out in the version of IAS 39 endorsed by the European Commission on 19 November 
2004. 

EN 

23 

   EN 

 
                                                 
•  Fair value of financial instruments 

Where the fair values of financial assets and financial liabilities recorded on the balance sheet 
cannot  be  derived  from  active  markets,  they  are  determined  using  a  variety  of  valuation 
techniques  that  include  the  use  of  mathematical  models.  The  input  to  these  models  is  taken 
from observable markets where possible, but where this is not feasible, a degree of judgement 
is required in establishing fair values. The judgments include considerations of liquidity and 
model inputs such as correlation and volatility for longer dated derivatives. 

•  Impairment losses on financial instruments 

The Fund reviews assesses at each reporting date whether an allowance for impairment should 
be  recorded  in  the  economic  outturn  account.  In  particular,  judgment  by  management  is 
required in the estimation of the amount and timing of future cash flows when determining the 
level of allowance required. 

The Fund shall assess at each balance sheet date whether there is any objective evidence that a 
financial asset or group of financial assets is impaired. If any such evidence exists, the entity 
shall apply different rules, depending on whether the financial assets is carried at amortised 
cost or classified as available-for-sale, to determine the amount of any impairment loss. 

3.2.3 

Summary of significant accounting policies 

3.2.3.1  Foreign currency translation 

These financial statements are presented in Euro (EUR), which is also the Fund’s functional 
and presentational currency. 

Monetary assets and liabilities denominated in currencies other than in Euro are translated into Euro at 
the exchange rate prevailing at the balance sheet date. The gain or loss arising from such translation is 
recorded in the economic outturn account. 

The  elements  of  the  economic  outturn  account  are  translated  into  Euro  on  the  basis  of  the 
exchange rates prevailing at the end of each month 

3.2.3.2  Cash and cash equivalents 

The  Fund  defines  cash  equivalents  as  current  accounts  or  short-term  deposits  with  original 
maturities of three months or less. 

3.2.3.3  Short-term investments 

The  bond  portfolio,  seen  as  a  short-term  investment  portfolio,  is  made  up  of  euro-
denominated securities. These securities are classified as Available For Sale (AFS) according 
to the accounting rules adopted by the Accounting Officer of the European Commission and 
consequently, are carried out at their fair value through equity. Unrealised gains or losses are 
reported  in  reserves  until  such  security  is  sold,  collected  or  otherwise  disposed  of,  or  until 
such security is determined to be impaired. If an available for sale security is determined to be 
impaired,  the  cumulative  unrealised  gain  or  loss  previously  recognised  in  own  funds  is 
included in economic outturn account for the year. Quoted securities are considered impaired 
if the decline in market price below cost is of such a magnitude that recovery of the cost value 
cannot be reasonably expected within the foreseeable future. 

EN 

24 

   EN 

 
On disposal of an available for sale security, the accumulated unrealised gain or loss included 
in  equity  is  transferred  to  the  economic  outturn  account  for  the  year.  Interest  income  on 
available-for-sale securities is included in “interest income”. 

The determination of fair values of available for sale investments is generally based on quoted 
market rates in active markets. 

These securities  are initially measured at their acquisition cost, being their fair value at this 
moment.  The  difference  between  the  entry  price  and  the  redemption  value,  i.e.  the 
premium/discount spread, is amortised over the remaining life of each of the securities using 
the effective interest rate method as specified under Accounting Rule 11.  

The Fund treats available-for-sale financial assets as impaired when a decline in the fair value 
of  an  available-for-sale  asset  has  been  recognised  directly  in  equity  and  there  is  objective 
evidence that the asset is impaired. A financial asset is impaired when its carrying amount is 
greater  than  its  estimated  recoverable  amount.  The  amount  of  the  cumulative  loss  that  is 
removed  from  equity  and  recognised  in  profit  and  loss  shall  be  the  difference  between  the 
acquisition  cost  and  current  fair  value,  less  any  impairment  loss  on  that  financial  asset 
previously  recognised  in  profit  and  loss.  If  in  a  subsequent  period,  the  fair  value  of  a  debt 
instrument classified as available-for-sale increases and the increase can be objectively related 
to  an  event  occurring  after  the  impairment  loss  was  recognised  in  profit  and  loss,  the 
impairment  loss  shall  be  reversed,  with  the  amount  of  the  reversal  recognised  in  profit  and 
loss. 

Evidence  of  impairment  is  mainly  about  significant  financial  difficulties  of  the  issuer,  a 
breach of contract, a restructuring of the debt of the issuer, a high probability of bankruptcy. It 
is important to stress that the disappearance of an active market because an entity’s financial 
instruments are no longer publicly traded is not evidence of impairment. A downgrade of an 
entity’s credit rating is not, in itself, evidence of impairment, although it may be evidence of 
impairment when considered with other available information. A decline in the fair value of a 
financial asset below its cost or amortised cost is not necessarily evidence of impairment.  

3.2.3.4  Taxation 

The Protocol on the Privileges and Immunities of the European Union, appended to the Treaty 
of  8  April  1965  establishing  a  Single  Council  and  a  Single  Commission  of  the  European 
Communities, stipulates that the assets, revenues and other property of the Institutions of the 
Union are exempt from all direct taxes. 

3.2.3.5  Capital 

Capital is composed of contributions received from the budget of the European Union and is 
recognized in the balance sheet on the date when payment of a contribution is received. 

3.3 

Financial Risk Management 

3.3.1 

Interest Rate and Liquidity Risks 

•  Interest rate risk position 

EN 

25 

   EN 

 
Theoretically,  hedging  instruments  could  be  used  to  manage  the  interest  rate  (market)  risk. 
However  as  agreed  between  the  Commission  and  the  EIB,  no  significant  risk  is  currently 
taken and therefore hedging is not performed.  

As  the  transactions  and  operations  are  only  denominated  in  Euro,  no  other  hedging  is 
required. 

EN 

26 

   EN 

 
The  distribution  of  the  Fund’s  holdings  at  31 December 2007  (market  value  excluding 
accrued interest) is detailed in the table below: 

Fixed rate investments 

Segments  Less than 3 

months 

EUR 

3 months to 1 
year 

1 to 10 years 

EUR 

EUR 

Variable rate 
securities 

EUR 

TOTAL 

EUR 

Current  

1,232,834.25 

0.00 

0.00 

0.00 

1,232,834.25

accounts 

Short-term 
deposits 
nominal 

AFS 
portfolio 

246,600,000.00 

0.00 

0.00 

0.00 

246,600,000.00

25,484,880.00  83,951,180.00  703,003,924.86  71,257,053.00 

883,697,037.86

TOTAL  273,317,714.25  83,951,180.00  703,003,924.86  71,257,053.00  1,131,529,872.11

Percentage

24.15% 

7.42% 

62.13% 

6.30% 

100.00%

The  distribution  of  the  Fund’s  holdings  at  31 December 2006  (market  value  excluding 
accrued interest) is detailed in the table below: 

Fixed rate investments 

Segments  Less than 3 

months 

EUR 

3 months to 1 
year 

1 to 10 years 

EUR 

EUR 

Variable rate 
securities 

EUR 

TOTAL 

EUR 

Current 
accounts 

Short-term 
deposits 
-
nominal 

AFS 
portfolio 

1,158,007.44 

0.00 

0.00 

0.00 

1,158,007.44

436,500,000.00 

0.00 

0.00 

0.00 

436,500,000.00

56,535,900.00  51,292,050.00  732,804,128.15  76,355,536.00 

916,987,614.15

TOTAL 

494,193,907.44  51,292,050.00  732,804,128.15  76,355,536.00  1,354,645,621.59

Percentage

36.48% 

3.79% 

54.09% 

5.64% 

100.00%

At 31 December 2007, for the Cash and Cash equivalents (fixed term deposits), the effective 
interest rate range is between 4.12% and 4.80%. For the Available For Sale (AFS) securities 
portfolio, the effective interest rate range is between 2.94% and 5.52%. 

EN 

27 

   EN 

 
 
 
•  Liquidity position 

The  table  below  provides  an  analysis  of  certain  assets,  liabilities  and  equity  into  relevant 
maturity  groupings  based  on  the  remaining  period  from  the  balance  sheet  date  to  the 
contractual  maturity  date.  It  is  presented  under  the  most  prudent  consideration  of  maturity 
dates. Therefore, in the case of liabilities the earliest possible repayment date is shown, while 
for assets it is the latest possible repayment date. 

Those assets and liabilities that do not have a contractual maturity date are grouped together 
in the “Maturity undefined” category. 

Maturity 

Less than 3 
months 

3 months to 1 
year 

1 to 10 years 

Maturity 
undefined 

TOTAL 

Assets in 
EUR 

Current 
accounts 

Short-term 
deposits  

Of which: 
accrued 
interests 

AFS 
portfolio  

Of which: 
accrued 
interests 

1,232,834.25 

248,027,886.27 

1,427,886.27 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

0.00 

1,232,834.25 

0.00 

248,027,886.27 

0.00 

1,427,886.27 

37,778,336.60  108,684,422.04 

754,125,764.86 

3,124,701.00 

903,713,224.50 

7,290,562.60  12,725,624.04 

0.00 

0.00 

20,016,186.64 

TOTAL  

287,039,057.12  108,684,422.04 

754,125,764.86 

3,124,701.00  1,152,973,945.02 

Liabilities 
in EUR 

Equity 

Account 
payable 

0.00 

678,951.39 

TOTAL  

678,951.39 

0.00 

0.00 

0 

0.00 

1,152,294,993.63  1,152,294,993.63 

0.00 

0.00 

678,951.39 

0 

1,152,294,993.63  1,152,973,945.02 

286,360,105.73  108,684,422.04 

754,125,764.86  (1,149,170,292.63) 

0.00 

Net 
liquidity 
position at 
31.12.2007 

EN 

28 

   EN 

 
 
 
 
 
 
286,360,105.73  395,044,527.77  1,149,170,292.63 

Cumulative 
liquidity 
position at 
31.12.2007 

0.00 

504,178,739.42  65,616,038.84 

800,919,596.25  (1,370,714,374.51) 

0.00 

504,178,739.42  569,794,778.26  1,370,714,374.51 

0.00 

Net 
liquidity 
position at 
31.12.2006 

Cumulative 
liquidity 
position at 
31.12.2006 

3.3.2  Credit Risk 

•  Fixed Term Deposits - Profile of counterparties 

In accordance with the agreement between the Community and the EIB on the management of 
the  Fund,  all  interbank  investments  should  have  a  minimum  short-term  credit  rating  of  A1. 
Short-term  interbank  investments,  including  accrued  interests,  by  type  of  counterparty  at 
31 December 2007 are as follows: 

Rating 

A1 

Aa1 

Aa2 

Aa3 

31.12.2007 

EUR 

31.12.2006 

EUR 

74,660,048.68 

30.10% 

171,276,161.81 

20,214,877.77 

53,063,919.03 

100,089,040.79 

8.15% 

21.40% 

40.35% 

44,158,408.19 

56,470,517.56 

166,670,264.86 

39.05% 

10.07% 

12.88% 

38.00% 

Total 

248,027,886.27

100.00%

438,575,352.42 

100.00%

EN 

29 

   EN 

 
 
 
•  Available for Sale portfolio - Profile of issuers 

All 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,  market  value  excluding  accrued  interests,  at  31 December 2007  is  as 
follows: 

Issuer 

Banks Aaa 

Banks Aa1 

31.12.2007 

EUR 

31.12.2006 

EUR 

182,561,476.19

20.67% 215,679,459.65 

23.52%

4,915,010.00 

0.56% 

0.00 

0.00% 

Government Body Aaa 

3,124,701.00 

0.35% 

8,240,068.00 

0.90% 

Multi Lateral Development Bank Aaa

0.00 

0.00% 

10,131,000.00 

1.10% 

Member States Aaa 

86,910,512.46 

9.83% 

98,055,010.00 

10.69% 

Member States Aa1 

71,605,941.05 

8.10% 

58,089,620.00 

6.33% 

Member States Aa3 

81,475,980.10 

9.22% 

66,610,240.00 

7.26% 

Member States A1 

73,552,307.35 

8.32% 

49,208,982.10 

5.37% 

Member States A2 

121,534,031.96 

13.75% 

111,374,580.00 

12.15% 

Member States A3 

3,694,547.60 

0.42% 

10,297,000.00 

1.12% 

Member States Baa1 

9,623,456.00 

1.09% 

9,750,500.00 

1.06% 

Other Financial InstitutionsAaa 

40,367,984.10 

4.57% 

55,623,830.00 

6.07% 

Public Companies Aaa 

109,410,776.75 

12.38% 

126,279,916.40 

13.78% 

Public Companies A2 

10,088,400.00 

1.14% 

10,327,000.00 

1.13% 

Special Purpose VehicleAaa 

84,831,913.30 

9.60% 

87,320,408.00 

9.52% 

Total 

883,697,037.86  100.00% 

916,987,614.15  100.00% 

EN 

30 

   EN 

 
3.4 

Short-term Investments – Available For Sale Assets 

The following table shows the situation of the Available For Sale Assets (including accrued 
interests) during 2007: 

Amount at 1 January 2007 

Acquisitions 

Disposals and withdrawals (original acquisition cost) 

Transfer between headings 

Exchange differences 

EUR

939,964,332.03

200,355,630.00

(216,465,900.80)

0.00

0.00

Change  in  carrying  amount  (actuarial  difference  &  change  of  accrual

(1,590,369.97)

Revaluation surplus/(deficit) fair value adjustment transfer to equity 

(18,550,466.76)

Impairment loss 

Amount at 31 December 2007 

0.00

903,713,224.50

At 31 December 2007, the nominal value of the investment portfolio was EUR 889.1 million, 
against a market value of EUR 883.7 million, without accrued interests. 

Two bonds held in the portfolio are issued by the European Community through the financial 
instrument “Macro-financial Assistance”. The position of these bond holdings at 31.12.2007 
are as follows: 

– 

ISIN XS0083965748  Market  Value  EUR  3,124,701.00;  accrued  interest  EUR 
53,646.72 

The  accrued  interests  at  31 December 2007  amounting  to  EUR  20,016,186.64  (2006:  EUR 
22,976,717.88) are split between: 

– 

– 

Fixed rate notes 

EUR 19,572,460.14 (2006: EUR 22,485,430.44) 

Floating rate notes  EUR 443,726.50 (2006: EUR 491,287.44) 

EN 

31 

   EN 

 
  
3.5 

Cash and Cash Equivalents 

The following table shows the split of the cash and cash equivalents: 

Description 

31.12.2007 

31.12.2006 

EUR 

EUR  

Unrestricted Cash 

A.  Amounts with Treasuries 

B. Accounts with Central Banks 

C. Current Accounts 

D. Imprest Accounts 

E.  Short-term Deposits 

F.  Cash in Hand 

G. Transfers (Cash in transit) 

H. Other  Cash  Equivalents  (Commercial  Papers  <3

I.  Funds in transit at year end 

Total 

0.00

0.00

0.00

0.00

1,232,834.25

1,158,007.44

0.00

0.00

248,027,886.27

438,575,352.42

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

249,260,720.52

439,733,359.86

EN 

32 

   EN 

 
 
3.6 

Current Liabilities 

Description 

31.12.2007 

31.12.2006 

EUR 

EUR 

Accounts Payable 

Management fees 

Other 

Total 

678,951.39

714,719.38

29,950.00

28,530.00

708,901.39

743,249.38

Management fees are payable to the EIB (hereafter referred to as the management fees) on an 
annual basis. The management fees are calculated as a percentage per annum of the average 
of Fund’s assets. This percentage is a declining rate depending on the Fund’s assets. 

3.7 

Financial operations revenues 

Total amount, thereof: 

Interest income, thereof:  

Interest income from short-term investments and cash
and cash equivalents 

Other financial income, thereof:  

Net realized gain on sale of financial (current & non-
current) assets 

2007 

EUR 

2006 

EUR 

50,810,833.85

52,981,320.04

50,810,833.85

52,981,320.04

50,810,833.85

52,981,320.04

2,900,301.39

2,900,301.39

0.00

0.00

The net realized gain on sale of financial assets EUR 2,900,301.39  is made up  of a total of 
seven sales during the year resulting in a gross gain on six sales of EUR 2,973,389.67 and a 
loss on one sale of EUR 73,088.28. 

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3.8 

Financial operations expenses 

2007 

EUR 

2006 

EUR 

Total amount, thereof: 

(836,434.05)

(903,894.45)

Other financial expenses, thereof:  

(836,434.05)

(903,894.45)

Realized  loss  on  sale  of  financial  (current  and  non-
current) assets  

Impairment  losses  on  financial  (current  and  non-
current) assets 

0.00

0.00

0.00

0.00

3.9 

Subsequent events 

There  have  been  no  material  post-balance  sheet  events,  which  would  require  disclosure  or 
adjustment to the 31 December 2007 financial state. 

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