EIB key to Europe’s growth plan
By Sarah Collins | Thursday 12 July 2012
Cyprus, the first eurozone country to hold the EU’s rotating Presidency in two years, faces the Herculean task of overseeing the start of a €120 billion growth plan designed to revive Europe’s flagging economy. The plan, inked at a European Council, on 28-29 June, will see the European Investment Bank take centre stage in the fight to boost investment and jobs across the bloc, replacing cash-strapped governments and risk-averse banks.
The EIB said earlier this year that it would slash crisis lending, which reached a peak of €79 billion in 2009, but the Luxembourg-based bank is now directly funding, guaranteeing or leveraging up to €65 billion in new investments over the next four years – more than half the size of the growth plan. It will do this via a €10 billion capital increase and by guaranteeing the issuance of a series of project bonds, which it is hoped will raise up to €4.5 billion in private funding for new transport, energy and broadband links. The Commission has also said that €55 billion in unspent EU Structural Funds can be “reallocated” to further guarantee selected EIB-funded projects.
EIB President Werner Hoyer said recently that the bank would “play its part in bringing Europe out of the crisis,” but EU officials have warned against seeing the plan - the brainchild of French President François Hollande - as a panacea. “It’s a camouflage,” said one European source, who did not want to be named. “The figures are real but not new,” the source added.
Moreover, the EIB cannot invest in problem countries, only in viable projects that fit its priorities – clean energy, modern infrastructures, boosting prospects for small businesses and helping companies finance research and development. Last year, almost 40% of the bank’s €60 billion in overall loans went to projects in Spain, Italy and Germany, which EU sources said was unlikely to remedy the immediate or long-term growth problems in the eurozone. “This expression for boosting investment and growth through the EU funds is very important but the devil is in the detail. In Spain, the last thing you need is new infrastructure development,” said one source.
Project bonds have been lauded as a key weapon in the EU’s crisis-fighting arsenal, with EIB estimates suggesting that they could generate €4.4 billion of private investment based on a €230 million cash pledge from the EU budget. IMF Managing Director Christine Lagarde has even mentioned them in the same breath as eurobonds – where sovereign states assume mutual responsibility for each other’s national debts and issue joint bonds to refinance them – a misnomer given sovereign states have nothing to do with the issuing of the project bonds.
The whole exercise is based on creating a new kind of bond market in Europe, one which EIB staff are confident investors will take up. “There is huge pressure by the investment community to deliver these kinds of supports,” said one official close to the project. But Fitch Ratings warned last month that it is “highly uncertain” how long it will take to create a liquid project bond market and that the bonds “will struggle to fill the gap left by retrenching banks in Europe, at least in the short term”.
The bonds themselves would be issued by a consortium of private companies that wins a government tender for a new toll road or section of railway, for example. Those companies inject equity funding into the project, then use the bonds – which are backed by a €230 million EU and EIB guarantee or ‘credit enhancement’ – to fund the rest. The hope is that long-term investors, such as pension funds and insurance companies, will buy them up, buoyed by the fact that they will share risk of the project.
The Commission estimates that €1.5 trillion to €2 trillion is needed over the next decade to meet its 2020 targets, which commit EU countries to raising employment and education levels, boosting spending on R&D, lowering carbon emissions and lifting people out of poverty. But Sharon Bowles, head of Parliament’s Committee on Economic and Monetary Affairs (ECON), says that regulations, such as Solvency II (for insurers) and the fourth overhaul of the Capital Requirements Directives, are actually making the 2020 targets harder to hit by hiking up the amount of capital banks, insurers and pension funds have to hold to guard against potential future losses on long-term investments. “If we can do things through project bonds and address some of the problems we’ve made for ourselves in regulation – we seem to have suddenly made it very expensive to invest in long-term bonds – that is helpful,” Bowles told
Project bonds will not be able to “make a bad project a good project,” said one EU source. The risk taken on by the EU and EIB is capped at 20% of the value of the project – so €20 million for a €100 million investment – while the fact that the EIB is wedded to its ‘triple A’ credit rating means the pilot phase of the bonds will likely be concentrated in richer countries, such as Germany and Poland. “Once this is an established asset class then we would go to more peripheral countries,” said one source. “You cannot save Greece with it.”
The first wave of project bonds will be launched under the Cyprus Presidency, for projects that fall under the Trans-European Transport (TEN-T), Trans-European Energy (TEN-E) and Competitiveness and Innovation (broadband) programmes. The hope is that a larger amount of money can be ringfenced in the 2014-2020 multiannual financial framework for a new wave of bonds to fund projects identified in the Commission’s Connecting Europe strategy (mostly gas and electricity interconnectors, rail links and broadband upgrades).