EUROPEAN COMMISSION

Brussels, 5.7.2016

COM(2016) 439 final

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

ON THE GUARANTEE FUND FOR EXTERNAL ACTION AND ITS MANAGEMENT IN 2015

{SWD(2016) 220 final}

Table of Contents

1.Introduction

2.Financial Position of the Fund at 31 December 2015

2.1.Financial flows of the Fund

2.2.Significant transactions

2.3.Significant transaction after the reporting date

2.4.Presentation of the accounts

2.4.1.Basis of preparation

2.4.2.Pre-consolidated financial statements for the Fund at 31 December 2015

3.Payments to or from the Fund

3.1.Legal basis for payments to the Fund from the general budget

3.2.Payments to or from the general budget in the course of the financial year

3.2.1.Provisioning of the Fund

3.2.2.Interest from the investment of the Fund’s liquid assets

3.2.3.Financial operations revenues

3.2.4.Revenues and expenses from operating activities

4.The Fund’s liabilities

4.1.Default payments

4.2.EIB remuneration

1.Introduction

Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 (codified version) (‘the Regulation‘) 1 established a Guarantee Fund for external actions (‘the Fund’) in order to repay the Union’s creditors in the event of default by beneficiaries of loans granted or guaranteed by the European Union. In accordance with Article 7 of the Regulation, the Commission entrusted the financial management of the Fund to the European Investment Bank (EIB) under an agreement between the Community and the EIB dated 25 November 1994, and subsequently amended on 23 September 1996, 8 May 2002, 25 February 2008 and 9 November 2010 (‘the Agreement’).

Article 8 of the 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.

This report together with the Commission Staff Working Document (SWD) provides this information. It is based on data received from the EIB, in line with the agreement.

2.Financial Position of the Fund at 31 December 2015

The financial position of the Fund is the sum of all the financial flows since the setting up of the Fund in 1994.

2.1.Financial flows of the Fund

The Fund totalled EUR 2,343,091,110.14 (see Annex of the SWD: Guarantee Fund financial statements as at 31 December 2015, as provided by the EIB). This is the sum of the flows since the Fund was established:

The accounting value of the Fund increased by about EUR 205 million in 2015. This is explained by :

Increasing

The contribution from the budget (provisioning amount) of EUR 257 million to adjust the Fund to the 9% target amount

The net revenues on financial operations amounted to EUR 32 million

Decreasing

Intervention of the Fund to cover defaulted payments by Syria for a total amount of EUR 60 million.

The portfolio valuation decrease by EUR 24 million due to the mark to market adjustment of its value.

2.2.Significant transactions

(1)Since November 2011, the EIB is facing arrears on Syrian sovereign loans. As a consequence, and in line with the guarantee agreement between the EU and the EIB, the EIB has made 29 calls on the EU Guarantee Fund up to 31 December 2015 for a total amount of EUR 225.1 million (see point 4.1 Default payments).

(2)In February 2015, the contribution from the budget to the Fund was calculated following Article 3 and Article 5 of the Regulation:

Article 3 of the Regulation 2 sets a target amount for the Fund of 9 % of the total outstanding capital liabilities arising from each operation, plus any unpaid interest due.

Article 5 of the Regulation states that the amount to be transferred from the budget to the Fund in year n + 1 is calculated on the basis of the difference between the target amount and the value of the Fund’s net assets at the end of year n - 1, calculated at the beginning of year n.

To adjust the Fund to the 9% of the total outstanding capital liabilities, an amount of EUR 257.1 million was entered in the 2016 budget for the provisioning of the Fund. At 31.12.2014, the target amount was EUR 2,371.8 million corresponding to the 9% of the total outstanding guaranteed operations (EUR 26,353.2 million). The difference between the target amount and the net assets of the Fund of EUR 2,114.7 million at 31.12.2014 was equal to EUR 257.1 million.

This amount was requested for the provisioning of the Fund in 2016 and was approved by the Council and the European Parliament as part of the approval of the 2016 budget in November 2015. It was subsequently recognised as a receivable of the Fund from the budget.

(3)In February 2015 an amount of EUR 144.4 million was transfered from the budget to the Fund corresponding to the provisioning amount for 2015 (see details in paragraph 3.2.1 provisioning of the Fund).

2.3.Significant transaction after the reporting date

In February 2016 an amount of EUR 257.1 million was transfered from the budget to the Fund corresponding to the provisioning for 2016.

2.4.Presentation of the accounts

2.4.1.Basis of preparation

The Fund's financial statements (as well as the pre-consolidated financial statements) have been prepared in accordance with the accounting rules adopted by the Accounting Officer of the European Commission, in particular "Accounting rule 11 - Financial instruments" as explained in the SWD.

2.4.2.Pre-consolidated financial statements for the Fund at 31 December 2015

The pre-consolidated financial statements of the Fund are prepared in order to include accounting operations which are not included in the Fund's financial statements prepared by the EIB (see SWD), which implies a difference in the total assets value of the Fund in the financial statements prepared by the EIB (EUR 2,343,091,110.14) and the total assets value of the Fund in the pre-consolidated financial statements (EUR 2 107 985 583). The pre-consolidated financial statements include any arrears due plus the interest accrued on late payments (fully impaired as of 31.12.2015) and other accounting accruals 3 until the full repayments of amounts due to the Fund. Thus, there will be a full set of financial statements for the Fund at the end of the year to be consolidated in the EU consolidated financial statements. The current assets in the pre-consolidated financial statements include a temporary receivable with the EIB of EUR 22,016,265 for guarantee calls not yet paid plus related amounts, where the EIB remains creditor of Syria until the payment of the call. The current liabilitites include a payable to the EIB of EUR 22,763,789 for guarantee calls not yet paid plus related amounts.

Guarantee Fund: Pre-consolidated balance sheet

The pre-consolidated balance sheet is the preparation of the balance sheet for its consolidation in the EU's consolidated financial statements. The main items are explained in the notes to the balance sheet.

Balance sheet – Assets

Balance sheet - Liabilities

Notes to the balance sheet:

‘Current receivables’ includes amounts of loans that have been called but not yet paid (payment in January - March 2016), plus related amounts.

The difference in ‘Retained earnings’ in equity compared with the financial position of the Fund presented in the SWD is explained by the successive repayments of calls and penalties to the Fund.

‘Current payables’ include the calls to guarantees unpaid at the balance sheet date plus related amounts, the accrual of the recovery fees due to the EIB, EIB management commission and audit fees.

Guarantee Fund: Pre-consolidated economic outturn account

In the same way as the balance sheet, the pre-consolidated economic outturn account is prepared for inclusion in the consolidated financial statements of the EU.

Notes to the economic outturn account:

The ‘Financial costs’ consist in impairment losses on subrogated loans, related to defaulted payments (see section 4.1)

3.Payments to or from the Fund

This section explains the financial flows going to or out of the Fund.

3.1.Legal basis for payments to the Fund from the general budget

The Regulation ensures an efficient use of budgetary resources by provisioning the Fund on the basis of the observed amounts of guaranteed loans outstanding. As the amount of outstanding liabilities increases, the EU budget contribution required to maintain the target amount for the Fund will also increase.

The target amount is 9 % of the Communities total outstanding capital liabilities arising from each operation, increased by unpaid interest due, including all types of operations covered (EIB, MFA and Euratom loans) outside the EU. The difference between the target amount and the value of the Fund’s net assets will result in provisioning from budget line 01.03.06 ‘Provisioning of the Guarantee Fund’ to the Fund or in payment from the Fund to the budget in the event of a surplus.

3.2.Payments to or from the general budget in the course of the financial year

3.2.1.Provisioning of the Fund

On the basis of the outstanding guaranteed operations of EUR 23,609.2 million as of 31.12.2013, an amount of EUR 144.4 million, was inserted in budget line 01.03.06 ‘Provisioning of the Guarantee Fund’ in the statement of expenditure in the general budget of the European Union for 2015. This amount was paid in one transaction from the budget to the Fund in February 2015.

3.2.2.Interest from the investment of the Fund’s liquid assets

Investment policy

The Fund’s liquid assets are invested in accordance with the management principles laid down in the Annex to the Agreement, as amended 4 . Accordingly, 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. To maintain a balance between the various instruments providing the required liquidity, a minimum of EUR 100 million is kept in money market instruments, particularly bank deposits.

Up to 80% of the Fund can be placed in a portfolio of bonds with a remaining maturity of no more than 10 years and 6 months from the date of payment. The average duration of the placements of all Fund assets may not exceed 5 years. The investments in bonds should respect some specific criteria such as liquidity, credit quality, eligibility of the counterparties and concentration limits. In order to ensure a good risk diversification, the total amount invested in the bonds per single issuer must not exceed 10% of the total nominal amount of the portfolio.

Performance

During the year 2015, the macro economic conditions and the very accommodative monetary policy environment has resulted in decreasing, and often negative, interest rates

The Fund delivered an absolute return of +0.47% during 2015, overperforming its benchmark by 0.9 bps. The benchmark of the Fund is a composite mainly built from iBoxx indices (in particular EUR Eurozone Sovereign and EUR Collateralized Covered indices) and Euribid for the short-term exposure. 

.The positive performance of the Fund in 2015 was mainly explained by the decline of the short end of the yield curves (see section 1.4.2 ‘Performance’ of the SWD for more details that occurred durint the year).

3.2.3.Financial operations revenues

In 2015, interest income on cash and cash equivalents, on securities and accrued income on subrogated loans totalled EUR 40 109 123, broken down as follows:

3.2.4.Revenues and expenses from operating activities

The result from operating activities amounted to EUR -1,113,894, which include the EIB management fees for EUR 861,228, other operating expenses (mainly custody fees) for EUR 190,955, the external audit fees for EUR 39,500, unrealised exchange gain on subrogated Loans for EUR 477,789 and accrued EIB recovery fees for EUR 500,000 (maximum agreed amount).

4.The Fund’s liabilities

The Fund's liabilities correspond to all the financial commitments due by the Fund.

4.1.Default payments

Calls on the Guarantee Fund following defaulted payments

In the wake of the deteriorating situation in Syria, the Foreign Affairs Council, the European Parliament and the Council had taken some decisions in 2011 towards the country. In particular, they prohibited disbursements by the EIB in connection with existing loan agreements as well as they supended EIB technical assistance contracts for sovereign projects in Syria. The restrictive measures have been thereafter enshrined in Council Regulation (EU) N° 36/2012 of 18 January 2012, as amended.

As a consequence, no new financing operation has been pursued by the EIB since May 2011 and all on-going disbursements and technical assistance services to the Syrian Arab Republic have been suspended since November 2011 until further notice.

Whereas in past years Syria had fully and timely serviced its loans to the Bank, since November 2011, the EIB is facing arrears on Syrian sovereign loans. As a consequence, and in line with the guarantee agreement between the EU and the EIB, the EIB has made 29 calls on the EU Guarantee Fund up to 31 December 2015 for a total amount of EUR 225.1 million. Payment for the last 3 calls (EUR 22.1 million) are due in the first quarter 2016.

Events after the reporting date

Until February 2016, an additional call for defaulting payments in Syria has been made for a total amount of EUR 7.8 million.

4.2.EIB remuneration

The EIB remuneration is composed by the management fees and the recovery fees. The management fees cover the management of the Fund. The recovery fees cover the EIB's recovery efforts regarding claims following defaults covered by the EU guarantee for EIB financing operations outside the Union.

The second Supplementary Agreement to the Agreement dated 8 May 2002 lays down that the Bank’s remuneration is to be calculated by applying degressive annual rates of fees to each tranche of the Fund’s assets. This remuneration is calculated on the basis of the annual average assets of the Fund.

The Bank’s remuneration for 2015 was set at EUR 861,228 and was entered in the economic outturn account and as accruals (liabilities) on the balance sheet.

The recovery fees due to EIB are calculated on the basis of the Recovery Agreement signed between the Commission and the Bank in July 2014. At the end of 2015 the cumulated accrued amount of the recovery fees was EUR 1,560,285.

(1) OJ L 145, 10.6.2009, p. 10; the Regulation codified and repealed Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for external actions.

(2) The Regulation stipulates that operations concerning accession countries covered by the Fund remain covered by the EU guarantee after the date of accession. However, from that date they cease to be external actions of the EU and are covered directly by the general budget of the European Union and no longer by the Fund.

(3) Other accounting accruals include exchange rate differences and recovery fees due to the EIB.

(4) Amended by Supplementary Agreement No 1 of 23 September 1996, Supplementary Agreement No 2 of 8 May 2002, Supplementary Agreement No 3 of 25 February 2008 and Supplementary Agreement No 4 of 9 November 2010.