EUROPEAN COMMISSION

Brussels, 20.8.2021

COM(2021) 465 final

REPORT FROM THE COMMISSION

TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS





ON THE GUARANTEE FUND FOR EXTERNAL ACTIONS AND ITS MANAGEMENT IN 2020

{SWD(2021) 224 final}

Table of Contents

1.Introduction

2.Financial Position and Significant Transactions of the Guarantee Fund

2.1.Financial Position of the Guarantee Fund at 31 December 2020

2.2.Significant Transactions of the Fund in 2020

2.2.1Calls on the Guarantee Fund 2020

2.2.2Provisioning of the Guarantee Fund 2020

2.3.Significant transactions after the reporting date (as of end March 2021)

3.Pre-consolidated Financial Statements of the Fund

3.1.Pre-consolidated Financial Position at 31 December 2020

3.2.Pre-consolidated Statement of Financial Performance

4.Guarantee Fund Treasury Management

4.1.Investment policy

4.2. Performance and market developments in 2020

5.Calls on the Guarantee Fund

6.EIB remuneration

1.Introduction

Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 (‘the Regulation‘) 1 established a Guarantee Fund for external actions (‘the Fund’) in order to provide a liquidity buffer 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 European Union and the EIB dated 25 November 1994, and subsequently amended on 23 September 1996, 8 May 2002, 25 February 2008, 9 November 2010 and 28 September 2018 2 (‘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 of the Fund at the end of the previous calendar year 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 and Significant Transactions of the Guarantee Fund

2.1.Financial Position of the Guarantee Fund at 31 December 2020

The Guarantee Fund totalled EUR 2,855,047,432.59 as of 31 December 2020 (EUR 2,828,738,292.88 as of 31 December 2019) (see Annex of the SWD: Guarantee Fund financial statements, as provided by the EIB).

The total balance sheet value of the Fund increased by about EUR 26.31 million in 2020. This is mainly explained by the following:

Increases:

·The contribution from the EU budget (provisioning amount) of EUR 42.34 million to adjust the Fund to its target amount of 9% of the total outstanding liabilities;

·The economic result on financial operations amounted to EUR 22.26 million;

·The portfolio valuation increased by EUR 13.39 million due to the mark-to-market adjustment of its value.

·EUR 0.70 million of historically called amount were recovered from a defaulted debtor.

·The payable to the EIB for the treasury management fees and for the audit fees outstanding at 31 December increased by 0.05 million

Decreases:

·Interventions of the Fund to cover defaulted payments for a total amount of EUR 52.43 million.

2.2.Significant Transactions of the Fund in 2020

2.2.1Calls on the Guarantee Fund 2020

Syria

In 2020, the EIB has continued 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 14 additional calls on the EU Guarantee Fund up to 31 December 2020 for a total amount of EUR 52.43 million (see point 5).

2.2.2Provisioning of the Guarantee Fund 2020

In February 2020 an amount of EUR 240.15 million was transferred from the budget to the Fund corresponding to the provisioning amount for 2019.

The calculation of the contribution from the EU budget to the Fund for 2021 was also calculated in February 2020 resulting in EUR 42.34 million.

It was calculated following Article 3 and Article 5 of the Regulation:

Article 3 of the Regulation sets the target amount for the Fund at 9 % of the total outstanding capital liabilities arising from each operation, plus any accrued 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 9% of the total outstanding capital liabilities, an amount of EUR 42.34 million was calculated based on guaranteed operations outstanding at 31 December 2019 and entered in the EU budget of 2021 for the provisioning of the Fund. The amount was approved by the Council and the European Parliament and recognised as an asset (receivable) of the Fund in the balance sheet at 31 December 2020.

The payment of the EUR 42.34 million to the Common Provisioning Fund (CPF) is planned to take place end-November as agreed internally. It is directly related to the previous transfer of the assets of the GFEA from the EIB to the Common Provisioning Fund (CPF) which is expected to be carried out in Q3 (end-July) subject to the adoption of the NDICI Regulation.

2.3.Significant transactions after the reporting date (as of end April 2021)

In January and March 2021, EUR 498,490.95 and EUR 167,718.31 were recovered respectively from the defaulted loan to Enfidha Airport (Tunisia).

In April 2021, a guarantee call of EUR 7.4 million was paid for defaulted payments of Syria (penalties applied by EIB).

3.Pre-consolidated Financial Statements of the Fund

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). They are part of the EU's consolidated financial statements.

3.1.Pre-consolidated Financial Position at 31 December 2020

Balance Sheet – Assets

Balance Sheet - Liabilities

The difference of EUR 42.34 million between the total pre-consolidated balance sheet value of the Fund (EUR 2,812,707,300) and the value of the Fund in the financial statements prepared by the EIB (EUR 2,855,047,433) can be mainly explained by the following items:

·The pre-consolidated balance sheet (assets) includes:

§all amounts subrogated to the EU as a result of the guarantee payments for EIB calls on defaulted loan instalments (arrears due plus the interest accrued on late payments). However, in view of the political situation of Syria and based on a decision of the Accounting Officer of the EC, these amounts have been fully impaired in the 2020 financial statements.

·The pre-consolidated balance sheet does not include:

§Financial provisions of EUR 112.8 million relating to future instalments of the remaining outstanding Syrian loans, that have been recognised in the pre-consolidated balance sheet in 2020.

§EUR 42.34 million of contribution from the EU budget to the Common Provisioning Fund (CPF) as this receivable is offset by the corresponding payable in the consolidated accounts of the EU.

·The payments of calls from the Guarantee Fund to the EIB (and where applicable successive recoveries of the calls and late interests) are recognised as decreases (increases) of the Net Assets (EU Contribution) in the financial statements prepared by the EIB. In the pre-consolidated financial statements, the amounts paid for EIB calls are not deducted from the Net Assets as they become subrogated amounts. Related amounts are either accounted for as revenues (accruing late interest and penalties, foreign exchange gains) or as expenses (provisions, impairments, financial guarantee liability, foreign exchange losses). This leads into a permanent difference between the Net Assets items (EU Contribution and Retained earnings) recognised in the financial statements prepared by the EIB and the pre-consolidated financial statements prepared by the EC.

3.2.Pre-consolidated Statement of Financial Performance

In the same way as the balance sheet, the pre-consolidated Statement of Financial Performance is prepared for inclusion in the consolidated Financial Statements of the EU.

·Expenses from operating activities mainly include EIB asset management fees (EUR 0.8 million), additions to financial provisions on the outstanding future Syrian instalments (EUR 1.1 million and foreign exchange losses (EUR 1.2 million).

·The Financial income mainly includes the interest income from the investment portfolio (EUR 6.8 million), realised gains on sale of financial assets (EUR 8.8 million), risk related remuneration from ERI private mandate operations (EUR 9.1 million) and accrued late payment interest on subrogated amounts (EUR 18.1 million).

·The Financial costs mainly include impairment losses (EUR 19.6 million) on amounts subrogated to the EU in 2020 (see point 5), realised losses on sale of financial assets (EUR 1.4 million) and recognised financial guarantee liability on ERI Private mandate operations (EUR 70.2 million).

4.Guarantee Fund Treasury Management

4.1.Investment policy

The Fund’s liquid assets are invested in accordance with the management principles laid down in the Annex to the Management Agreement, as amended 3 . Accordingly, sufficient assets shall be placed in monetary assets to cover the short term (less than one year) outflows, at a proportion to be set out in the annual investment strategy. The remaining assets may be allocated to medium and long term instruments, with a maximum maturity of 10 years and 6 months from the payment date (medium and long-term portfolio). As of end of 2020, the overall modified duration of the Fund portfolio was ca. 3 years.

4.2.Performance and market developments in 2020

The performance of the Fund portfolio was monitored on a mark-to-market basis. During 2020, the Fund portfolio delivered a return of 1.074%, outperforming the benchmark by 28.6 bps. The performance was shaped by the high volatility while the lower yield environment continued, supported by the accommodative stance of fiscal and monetary policy during the pandemic. The positive return translated into a positive contribution of EUR 30 million. As of end 2020, the market value of the Fund portfolio amounted to ca. EUR 2,810 million.

The pandemic created sudden and unparalleled challenges to global economy. Measures to contain the spread of the virus had a pronounced negative effect on the economic activity, a contraction of the global trade and increase in financial market volatility. Large parts of the global economy were in the lockdowns, fuelling consumer uncertainty and weakening the demand, with the service sectors facing the most negative impact and manufacturing having shown more resilience.

The monetary and fiscal policy stance remained supportive. In Euro area, the ECB has introduced a new temporary Pandemic Asset Purchase Programme for a total of EUR 1850 bn, complementing the existing Asset Purchases Programmes (APP). Additional monetary accommodation was delivered through easing of conditions for Long Term Refinancing Operation (LTRO) and Targeted Long Term Refinancing Operations (TLTRO) and extending the APP by the additional temporary envelope of EUR 120 bn. In the US, the Federal Reserve introduced a set of measures to stabilise markets and stimulate growth, including the 2 new facilities (the Primary and the Secondary Market Corporate Credit Facility), removing caps on planned asset purchases under QE and cutting its rate for 1.5 percentage points since March 2020, bringing it to near-zero levels.

The financial markets performed relatively well in late 2020, on the back of improved risk sentiment, reassuring news on the vaccine development and optimism on the fiscal stimulus package following the US presidential elections. In Europe, the introduction of Next Generation EU (NGEU) programme and Support to mitigate Unemployment Risks in an Emergency (SURE) instrument further bolstered the fiscal measures on the national level, helping to gain the momentum and compress the spreads. Against this backdrop, the rates and credit in the euro area continued to decrease, albeit at a slower pace than before, while the Treasury long-term yields trended higher.

5.Calls on the Guarantee Fund

Syria

In the wake of the deteriorating situation in Syria, the Foreign Affairs Council, the European Parliament and the Council took decisions in 2011 prohibiting disbursements by the EIB in connection with existing loan agreements as well as supending EIB technical assistance contracts for sovereign projects in Syria. The restrictive measures were 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 Syria have been suspended since November 2011 until further notice.

Since November 2011, the EIB is facing arrears on sovereign loans that were granted to Syria. As a consequence, and in line with the relevant guarantee agreements between the EU and the EIB, the EIB has made 91 calls on the EU Guarantee Fund up to 31 December 2020 for a total amount of EUR 528.39 million (including penalties applied by EIB and amounts recovered).

6.EIB remuneration

The EIB remuneration is composed of the management fees and the recovery fees. The management fees cover the asset management of the Fund. The recovery fees cover the EIB’s external recovery expenses 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 establishes that the Bank’s management fees shall 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 management fees for 2020 were set at EUR 837,634 and were entered as expense in the Statement of Financial Performance and as accruals (liabilities) on the Balance Sheet.

The Recovery Agreement signed between the Commission and the Bank in December 2018 only envisages payment for EIB’s external (and no longer internal) recovery expenses.

(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. It has been amended on 14.3.2018 by Regulation (EU) 2018/409 of the EP and of the Council.

(2)    Supplementary Agreement no 5 to the Agreement relating to the Management of the Guarantee Fund between the European Union and the European Investment Bank - Ref. Ares(2018)5207374 - 10/10/2018.

(3) 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, Supplementary Agreement No 4 of 9 November 2010 and Supplementary Agreement No 5 of 28 September 2018.