Report from the Commission - Annual Report from the Commission on the Guarantee Fund and the management thereof in 2008 {SEC(2009) 745}
Date: 2009-06-05
Institutions: European Commission
Subjects: activity report, credit guarantee, financial management, fund (EU)

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 5.6.2009 
COM(2009) 258 final 

REPORT FROM THE COMMISSION 

Annual report from the Commission  
on the Guarantee Fund and the management thereof in 2008 

{SEC(2009) 745} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

Legal basis.................................................................................................................... 3 

Position of the Fund at 31 December 2008.................................................................. 4 

Financial analysis ......................................................................................................... 4 

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

Pre-consolidated Financial Statement of the Guarantee Fund at 31 December 2008.. 6 

2.3.1.  Guarantee Fund Pre-consolidated Balance Sheet ........................................................ 7 

2.3.2.  Guarantee Fund Pre-consolidated Economic Outturn Account ................................. 10 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

4. 

4.1. 

4.2. 

Payment from or into the Fund .................................................................................. 11 

Legal basis for payment to the Fund from the general budget................................... 11 

Payment from or to the general budget in the course of the financial year ............... 11 

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

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

The Fund's liabilities .................................................................................................. 13 

Default payments ....................................................................................................... 13 

EIB remuneration ....................................................................................................... 13 

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1. 

LEGAL BASIS  

Council  Regulation  (EC,  Euratom)  No 2728/94  of  31 October 1994  (OJ  L 293, 
12.11.1994,  p. 1;  “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. The Regulation was 
amended  by  Council  Regulation  (EC,  Euratom)  No 1149/99  of  25 May 1999  (OJ 
L 139,  2.6.1999,  p. 1),  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 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  the  management  thereof 
("statement of financial performance") and a financial statement for the Fund for the 
preceding year ("statement of financial position of the Fund"). Further details of the 
report  covering  the  year  2008  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 a 
report  to  the  European  Parliament,  the  Council  and  the  Court  of  Auditors  on  the 
situation of the Fund and the management thereof for each financial year by 31 May 
of the following year. 

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2. 

POSITION OF THE FUND AT 31 DECEMBER 2008 

2.1. 

Financial analysis 

The  position  of  the  Fund  is  presented  in  accordance  with  International  Financial 
Reporting Standards (IFRS) at the close of the 2008 financial year. The Fund totalled 
EUR 1 091 447 384.92 (see Section 3 of the Annex: Statement of Financial position 
of the Fund at 31 December 2008, as provided by the EIB). This is the sum, since the 
Fund was established, of all: 

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budget payments to the Fund; 

successive yearly net results; 

recoveries of payments made by the Fund for 
defaults; 

accrued2  EIB  management  and  audit  fees  in 
2008  corresponding  to  the  payments  to  be 
made in 2009; 

commission  received  on  late  recovery  in 
2002; 

adjustment due to application of the 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  of  the  surplus  in  the 
Fund  to  the  general  budget  of  the  European 
Union; 

less  the  repayment  to  the  budget  in  2005, 
accounting  for  9%  of  outstanding  operations 
as  at  1 May 2004  granted  to  the  ten  new 
Member  States  (See  the  2004  amendment  to 
the Fund Regulation in Section 1); 

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

+ EUR 2 799 914 500.00

+ EUR 676 733 999.20

+ EUR 576 705 008.19

+ EUR 689 972.32

+ EUR 5 090 662.91

+ EUR 11 565 625.28

- EUR 477 860 856.19

- EUR 1 901 620 000.00

- EUR 338 831 402.07

- EUR 260 940 124.72

Financial  position  of 
December 2008. 

the  Fund  at  31 

EUR 1 091 447 384.92

The  total  net  balance  sheet  of  the  Fund  (i.e.  the  Fund's  net  cash  resources)  at  31 
December 2008 amounts to EUR 1 182 717 412.60. This is the sum of the financial 
position  of  the  Fund  EUR  1  091  447  384.92,  minus  accrued  EIB  and  audit  fees  of 

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This amount of EUR 689 972.32 includes EUR 658 322.32 in EIB management fees and external audit 
fees of EUR 31 650.00 in 2008 (see paragraph 3.6, current liabilities, in the annex).  

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EUR 689 972.32,  of  which  EUR 658 322.32  in  management  fees  (2008  EIB 
remuneration),  and  the  transfer  from  the  budget  of  EUR 91 960 000.00,  as 
established in 2008 for the 2009 budget.3  

Article 3 of the amended Regulation4 requires the Fund to reach a target amount set 
at 9% of the total outstanding capital liabilities arising from each operation, plus any 
unpaid interest receivable. 

Thus,  outstanding  lending  and  loan  guarantee  operations  for  third  countries  plus 
accrued  interest  totalled  EUR 14  183  712  378.94  at  31 December 2008,  of  which 
EUR 136 800 205.24 was accrued interest. The ratio between the Fund's resources of 
EUR 1 182 717 412.60 and outstanding capital liabilities within the meaning of the 
amended Regulation was 8.34%. Since this is lower than the target amount of 9% of 
the 
of 
EUR 1 276 530 000.00), a transfer 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.  The  amount  to  be  included  in  2009  as  provisioning  in  the 
Preliminary Draft Budget of 2010 is EUR 93 810 000.00. 

outstanding 

guaranteed 

(rounded 

amount 

amount 

total 

2.2. 

Accounting presentation 

Since  the  Commission  decided  to  present  its  accounts  in  accordance  with  new 
accounting  rules  based  on  IPSAS/IFRS  principles,  the  pre-consolidated  financial 
statements of the Fund have also been drawn up in accordance with these principles, 
as explained in the Annex. 

2.3. 

Pre-consolidated  Financial  Statement 
31 December 2008 

of 

the  Guarantee  Fund 

at 

The  total  amount  of  the  pre-consolidated  balance  sheet  is  EUR 1 091 447 384.92. 
This includes the total amount of the Fund plus any arrears covered by the Fund, the 
accrual of interest on late payments and other accounting accruals and thus produces 
a full set of financial statements for the Fund at the year-end to be consolidated in the 
EU consolidated balance sheet. 

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

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The amount of EUR 91 960 000.00 was paid into the Fund on 23 January 2009 from the general budget 
of the European Union. 
The  amended  Regulation  stipulates  that  operations  vis-à-vis  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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2.3.1.  Guarantee Fund Pre-consolidated Balance Sheet 

Balance sheet: Assets (EUR) 

2008 

2007 

Current assets 

Short-term receivables 

Others 

983 923.27

983 923.27

Short-term investments 

886 949 667.40

903 713 224.50

AFS Portfolio – cost 

857 292 051.50

893 521 021.50

AFS Portfolio – actuarial difference 

-633 286.00

-5 928 251.48

AFS Portfolio – adjustment to fair value 

11 509 579.98

-3 895 732.16

AFS Portfolio – accruals 

18 781 321.92

20 016 186.64

AFS Portfolio – impairment 

Cash and cash equivalents 

204 497 717.52

249 260 720.52

Current accounts 

1 209 530.44

1 232 834.25

Short-term deposits – nominal 

182 557 991.00

246 600 000.00

Accrued interests on short-term deposits 

872 562.49

1 427 886.27

Other cash equivalents – cost 

19 842 008.01  

Accrued 
equivalents 

interests  on  other 

cash 

15 625.58  

Total Current Assets 

1 091 447 384.92

1 153 957 868.29

TOTAL 

1 091 447 384.92

1 153 957 868.29

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Balance sheet: Liabilities (EUR) 

2008 

2007 

A. EQUITY 

Capital (Guarantee Fund) 

298 522 973.21

424 272 973.21

Payment from the budget 

298 522 973.21

298 522 973.21

(surplus to be paid to the budget) 

125 750 000.00

Reserves 

11 565 625.28

-3 627 413.49

First time application –fair value reserve 

56 045.30

268 318.67

Change in fair value of AFS assets 

11 509 579.98

-3 895 732.16

Accumulated surplus/deficit 

732 583 019.02

679 821 791.09

Results brought forward 

732 583 019.02

679 821 791.09

Economic result of the year 

48 085 795.09

52 761 227.92

Total Equity 

1 090 757 412.60

1 153 228 578.73

B. CURRENT LIABILITIES 

Accounts payables 

689 972.32

729 289.56

Others 

689 972.32

729 289.56

Total current liabilities 

689 972.32

729 289.56

TOTAL 

1 091 447 384.92

1 153 957 868.29

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Note on the balance sheet: 

•  "Short-term receivables/others" refer to the amount of calls on the Fund. This includes the 
capital, interest and penalties due to the budget of the European Union following release of 
the Fund guarantee. 

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

•  "Accounts payables/others" in 2008 include the EIB management commission, audit fees, 
the accrual of closing accounts audit fees and the accrual of the recovery fees due to the 
EIB following payment of the penalty fees due to the Fund. 

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2.3.2.  Guarantee Fund Pre-consolidated Economic Outturn Account 

Guarantee Fund – Consolidated Economic Outturn 
Account (EUR) 

2008 

2007 

Financial operations revenues 

48 907 685.22 

53 711 135.24

Interest income 

Interest income on cash and cash equivalents 

8 095 172.09 

10 018 308.25

Interest income on AFS assets 

39 622 151.89 

40 792 525.60

Other interest income 

Exchange gains 

105 124.43 

Realised gains on sale of AFS assets 

1 085 236.81 

2 900 301.39

Reversal of impairment losses on AFS assets 

Other financial income 

Financial operations expenses 

-821 890.13 

-949 907.32

Interest charges 

Interest charges on cash and cash equivalents 

Exchange losses 

-115 874.33

Realised losses on sale of AFS assets 

Impairment losses on AFS assets 

Other financial charges 

-821 890.13 

-834 032.99

of which: Management fees 

-658 322.32 

-835 014.05

SURPLUS FROM NON-OPERATING ACTIVITIES 

48 085 795.09 

52 761 227.92

SURPLUS FROM ORDINARY ACTIVITIES 

Extraordinary gains 

Extraordinary losses 

SURPLUS FROM EXTRAORDINARY ITEMS 

ECONOMIC RESULT OF THE YEAR 

48 085 795.09 

52 761 227.92

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Note on the Pre-consolidated Economic Outturn Account: 

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

3. 

PAYMENT FROM OR INTO THE FUND 

3.1. 

Legal basis for payment to the Fund from the general budget 

In  line  with  the  amended  Regulation,  a  new  rule  applies  to  the  provisioning  of  the 
Fund. In this context, one of the main advantages of this system is its simplicity and 
the  certainty  regarding  budgetary  requirements,  as  all  types  of  operations  covered 
(EIB, MFA, Euratom loans) are known and apply the same rule of 9% of loans and 
guaranteed loans outstanding to calculate the target amount. 

Under  the  Interinstitutional  Agreement  between  the  European  Parliament,  the 
Council  and  the  Commission  on  budgetary  discipline  and  sound  financial 
management,5 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 

The  main  objective  of  the  2007  amendment  to  the  Regulation  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. 

On  the  basis  of  outstanding  guaranteed  operations  of  EUR 12 427 580 000.00  as  at 
31.12.2007,  an  amount  of  EUR 91 960 000.00,  corresponding 
the  2007 
provisioning,  was  inserted  in  budget  line  01040114  "Provisioning  of  the  Guarantee 
Fund" for 2008 in the statement of expenditure in the general budget of the European 
Union of the year 2009. This amount was paid in one transaction from the Budget to 
the Fund on 23.01.2009.  

to 

3.3. 

Interest from 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, 
as  amended  by  Supplementary  Agreement  No 1  of  17/23 September 1996, 
Supplementary  Agreement  No 2  of  26  April/8 May 2002,  and  Supplementary 
Agreement No 3 of 25 February 2008. 20% 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 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 

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OJ C 139, 14.6.2006, p. 1. 

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balance between the various instruments providing the required liquidity, a minimum 
of EUR 100 000 000.00 is kept in monetary investments, particularly bank deposits. 

In 2008, the portfolio achieved a total return of 6.42%. 

Market conditions in 2008 were extremely difficult, as the financial crisis spread and 
affected all banks and started to impact on the real economy. The performance of the 
portfolio was inferior to the benchmark (see annex in paragraph 1.4.2. "Performance" 
for  details).  At  the  end  of  2008,  this  underperformance  amounted  to  77.56  basis 
points.  Underperformance  of  the  Fund  was  particularly  significant  from  the  middle 
of  September  after  the  collapse  of  Lehman  Brothers,  and  a  substantial  widening  of 
yield  spreads  had  a  negative  impact  on  securities  not  belonging  to  the  basket  of 
bonds underlying the Eurozone Sovereign Iboxx indexes. In particular, bonds issued 
by  eastern  European  governments,  in  which  the  Fund  portfolio  has  positions, 
suffered  significant  price  drops  in  October  and  November.  In  December  2008  this 
underperformance was less severe due to the stabilisation of the market. 

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  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 
any concentration of risk. 

In 2008, interest income on cash and cash equivalents, on the Fund current accounts 
and on securities totalled EUR 48 802 560.79, broken down as follows: 

– 

– 

From  deposits  and  current  accounts:  EUR 8 043 015.28;  this  reflects  the 
situation at 31 December 2008, including interest received on bank deposits of 
EUR 8 528 274.58 and changes in accrued interest (EUR 539,698.20) in 2008. 
Current accounts amounted to EUR 54 438.90, comprising interest recorded on 
current accounts. 

this 

portfolio: 

securities 

EUR 39 622 151.89; 

includes 
From 
EUR 40 834 028.61  in  interest  on  securities  and  changes  in  accrued  interest 
(EUR 1 234 864.72)  at  31  December  2008.  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.  Of this  figure, an amount of EUR 22 988.00 
must  be  adjusted  from  the  securities  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. 

3.4. 

Recovery from defaulting debtors  

Penalty interest of USD 1 448 433.44 was recovered from the Republic of Argentina 
on  12  December  2008.  At  31.12.2008,  the  Fund  has  no  amount  called  to  be 
recovered. 

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4. 

THE FUND'S LIABILITIES 

4.1. 

Default payments 

The Fund was not called for default payments in 2008. 

4.2. 

EIB remuneration 

The  second  Supplementary  Agreement  to  the  Agreement  signed  on  26  April  and 
8 May 2002 lays down that the Bank's remuneration is to be calculated by applying 
degressive  annual  rates  of  commission  to  each  of  the  tranches  of  the  Fund's  assets 
respectively. This remuneration is calculated on the basis of the average assets of the 
Fund. 

The Bank's remuneration for 2008 was set at EUR 658 322.32 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 2009. 

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