Too many hopes pinned on EU bank

February 24, 2009

paul-taylor— Paul Taylor is a Reuters columnist. The opinions expressed are his own —

It works more like a sprinkler than a power hose, but the European Investment Bank has a role to play in preventing a financial inferno from sweeping across central and eastern Europe.

The trouble is that politicians have overloaded the European Union’s long-term lending arm with exaggerated expectations, calling on it like a fire brigade in every emergency, from saving credit-starved small firms to greening the car industry, combating the energy crisis and fighting climate change.

The need to serve many masters and focus on many priorities limits its impact, but the EIB now has more resources to back economic stimulus programs in the 27-nation bloc.

Philippe Maystadt, president of the Luxembourg-based bank, has received so many pleas for billions since the credit crisis struck that he starts by listing what the EIB cannot do.

It is not a central bank. It cannot provide liquidity. It cannot take equity stakes in banks and it cannot fund budgets. Its role is to finance investment projects that are aligned with the 27-nation EU’s policy objectives.

“What we can do is provide finance as intensely and rapidly as possible for investment. That’s what we’re doing (and) we aim to do more, better and faster,” Maystadt, a former Belgian finance minister, said in an interview.

The EIB plans to lend more than 7.5 billion euros to small and medium-size enterprises and local authorities in central and eastern Europe this year through local intermediary banks. That is three times last year’s volume, and on more flexible terms.

The bank has a triple-A credit rating because it is owned and backed by the EU’s solvent sovereign governments. So it borrows at cheap rates and lends the money on the same terms to clients who would otherwise have to pay far more to borrow.

Firms may now use the cash as working capital, for research and development and to buy patents and not just to buy goods.

The EIB is also working to address the special problems of eastern Europe. From Warsaw to Kiev, floating currencies have sunk against the euro, punishing hard-currency borrowers, while governments are struggling to raise funds as capital flows from parent banks in western Europe to eastern subsidiaries dwindle.

With the European Bank for Reconstruction and Development (EBRD) and the World Bank’s International Finance Corporation (IFC), Maystadt is looking to support banks in eastern Europe.

“For example one could imagine combining equity stakes from the EBRD with bigger credit lines provided by the EIB, using the specific instruments of each institution in a coordinated way to increase efficiency. If the EBRD comes in to reinforce a bank’s capital, it means we can lend more to that bank,” he said.

EU finance ministers agreed in December to raise the EIB’s capital by 67 billion euros to 232 billion euros so it can boost lending by 30 percent this year and in 2010 to help economic recovery. That is a stretch for the bank’s 1,400 staff.

The extra 15 billion euros a year will be targeted at SMEs, fighting climate change and speeding disbursements for projects in the new member states in central and eastern Europe.

Under EU rules, national governments or local authorities have to finance 35 percent of EIB-backed projects. The newcomers often lack the funds, especially during the credit crunch, so the EIB is also helping fund the local share.

However, the obligation to be even-handed among EU member states makes it hard to concentrate a large amount of lending on a few priorities or countries.

“It’s true we are an EU institution, so we have to work for all member states and our interventions have to be well balanced,” Maystadt said.

So far, the EIB has had no trouble borrowing on capital markets, but things could get tighter and more expensive as the bank raises its extra funds just as governments are tapping the market massively to finance national recovery plans.

That raises the question of whether the EIB could borrow from the European Central Bank, which is not allowed to lend money directly to member states.

“This question hasn’t yet been posed,” Maystadt said. “For the moment we don’t call on the ECB. It’s a question that would have to be examined with the ECB. That hasn’t yet been done.”

Pressed to say whether the idea was topical, he laughed and fell silent.

One comment

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The EU bet at the casino and is in danger of losing everything.

Hubris, as always, seems to muddy the waters. Jump-starting 1940’s banking systems to 1990 standards looked impossible from the start, and its surprising nobody picked up on this.

Small countries borrowing in foreign currencies? Stupid. And the lenders, even more stupid.

In the future, small steps. Not giant leaps into the world of capitalism. Russia already suffered its own sovereign debt crisis. Now smaller countries: Czech, Hungary, Romania, Latvia, are about to face insolvency (not to forget about high-flying Iceland or Ireland of course).

When are idiot bankers going to start using their MBA’s and rely on solid facts, rather than running with the bulls in Spain (another perennial basket case)? How many times do we have to go through this irritating mess before we get real management?

Central/South American debt, Asian debt, African debt, Russian debt…..who are the idiots lending these people money? Stop lending them money. Most of the citizens of 80% of the world live for a year on little more than what I spend in 2 months on housing, and I am not by any means affluent. The other 30 million Canadians would agree with me on that.

All I see are self-important men in suits playing leapfrog to hand money to people who will never be able to repay it, just so they can book quarterly results and collect their fat bonuses.

Personally, I hope the whole system collapses so we can start fresh. All the fake money that was lent to people should be written off, all the bankers jailed (if stupidity is not a crime, make it one), and let’s go back to making real products.

The financial parasite has now caused 3 recessions in 20 years.

Posted by Robert | Report as abusive