EU growth plans extends British taxpayer risk through EIB
by Bob Lyddon
10 July 2012
An increase in the European Investment Bank's activities mean that the public sector will spend more when the private sector is in the doldrums, putting EU member states like the UK at great risk
At the European Union summit at the end of June, the British Prime Minister David Cameron agreed to the growth package proposed by the eurozone 'big four' - Germany, France, Italy and Spain. The amount of the growth plan is around €130bn, the bulk of which will originate from loans from the European Investment Bank - the EU's political bank.
The plan envisages the EIB making new loans of over €90bn, funded by new bond issues on international capital markets of over €80bn and a capital call on shareholders - the EU member states – of €10bn. The capital call requires cash to be paid in by member states. And the bond issues use the member states' faith and credit to assure repayment to international investors.
Cameron has signalled his willingness to meet the UK's €1.6bn share of the capital call into the EIB. The United Kingdom is a 16.17 per cent shareholder in the EIB, has capital already invested of €1.9bn and has an unconditional obligation to pay in an extra €35.7bn of capital should it be called to do so. This new call increases the amount invested to €3.5bn, and correspondingly reduces the future obligation to pay to €34.1bn. Therefore, the UK's total exposure to EIB is €37.8bn in invested capital plus unconditional obligation to pay in more.
The EIB is the EU's main channel for spending on public infrastructure - on projects which, according to the economic theories underlying union policy, should form a platform for accelerated growth and stability. They should not be white elephant projects or just another way of allowing governments to accelerate imputed future tax revenues, spend them now, create an illusion of prosperity and enable their re-election. The EIB raises its money on the creditworthiness of its shareholders and for the UK it is one of the main channels through which Britain's AAA credit is harnessed to back the EU and the eurozone.
The new capital call allows the EIB to take on significant extra borrowing, possibly over €80bn to add to the€ 400bn it already has. With that it makes loans mainly to public sector borrowers - €168.4bn to borrowers in the GIPSI countries of Greece, Italy, Portugal, Spain and Ireland. The quality of the EIB's loan portfolio has come under pressure as an inevitable consequence of the single currency crisis. The big four plan appears to be simply to increase lending in accordance with existing loan underwriting criteria, thereby increasing exposure to GIPSI countries as well as to other ones - like France - that have had their ratings cut.
An increase in the EIB's activities is not justified by the creditworthiness of the borrowers. It is an enactment of the theory that the public sector should spend more when the private sector is in the doldrums, in order to even out the peaks and troughs of the economic cycle. This overlooks the fact that public expenditure grew rapidly during the good times and public borrowers have maxed out on their debt capacity. Indeed, it could be argued that much of the economic growth of the period 1990-2008 was caused simply by the public sector borrowing on the taxpayer's faith and credit, and spending - subsequently choking off private sector growth.
On that basis, the EIB requires a thorough investigation of the current loan portfolio and not a massive increase. The EIB has expanded its activities during the crisis by lending aggressively into the public sectors of precisely those countries where the sovereign borrower – the Kingdom of Spain and the Republic of Italy - has experienced difficulty in raising funds. This policy is grossly irresponsible.
And the borrowings - all of them - taken up on international markets to fund those loans represent a risk to the UK. If the EIB cannot repay them out of its own resources, it can call on all of the remainder of Britain's subscribed but uncalled capital. David Cameron's posture perpetuates that of successive governments: to exercise no control over the EIB or its lending policy, nor over the degree to which the UK is put further at risk.
Bob Lyddon is a management consultant specialising in European Banking and author of the Bruges Group report The UK's risks and exposure to the European Investment Bank and other financial European mechanisms: amounts, safeguards and breaches in the dyke
At the European Union summit at the end of June, the British Prime Minister David Cameron agreed to the growth package proposed by the eurozone 'big four' - Germany, France, Italy and Spain. The amount of the growth plan is around €130bn, the bulk of which will originate from loans from the European Investment Bank - the EU's political bank.
The plan envisages the EIB making new loans of over €90bn, funded by new bond issues on international capital markets of over €80bn and a capital call on shareholders - the EU member states – of €10bn. The capital call requires cash to be paid in by member states. And the bond issues use the member states' faith and credit to assure repayment to international investors.
Cameron has signalled his willingness to meet the UK's €1.6bn share of the capital call into the EIB. The United Kingdom is a 16.17 per cent shareholder in the EIB, has capital already invested of €1.9bn and has an unconditional obligation to pay in an extra €35.7bn of capital should it be called to do so. This new call increases the amount invested to €3.5bn, and correspondingly reduces the future obligation to pay to €34.1bn. Therefore, the UK's total exposure to EIB is €37.8bn in invested capital plus unconditional obligation to pay in more.
The EIB is the EU's main channel for spending on public infrastructure - on projects which, according to the economic theories underlying union policy, should form a platform for accelerated growth and stability. They should not be white elephant projects or just another way of allowing governments to accelerate imputed future tax revenues, spend them now, create an illusion of prosperity and enable their re-election. The EIB raises its money on the creditworthiness of its shareholders and for the UK it is one of the main channels through which Britain's AAA credit is harnessed to back the EU and the eurozone.
The new capital call allows the EIB to take on significant extra borrowing, possibly over €80bn to add to the€ 400bn it already has. With that it makes loans mainly to public sector borrowers - €168.4bn to borrowers in the GIPSI countries of Greece, Italy, Portugal, Spain and Ireland. The quality of the EIB's loan portfolio has come under pressure as an inevitable consequence of the single currency crisis. The big four plan appears to be simply to increase lending in accordance with existing loan underwriting criteria, thereby increasing exposure to GIPSI countries as well as to other ones - like France - that have had their ratings cut.
An increase in the EIB's activities is not justified by the creditworthiness of the borrowers. It is an enactment of the theory that the public sector should spend more when the private sector is in the doldrums, in order to even out the peaks and troughs of the economic cycle. This overlooks the fact that public expenditure grew rapidly during the good times and public borrowers have maxed out on their debt capacity. Indeed, it could be argued that much of the economic growth of the period 1990-2008 was caused simply by the public sector borrowing on the taxpayer's faith and credit, and spending - subsequently choking off private sector growth.
On that basis, the EIB requires a thorough investigation of the current loan portfolio and not a massive increase. The EIB has expanded its activities during the crisis by lending aggressively into the public sectors of precisely those countries where the sovereign borrower – the Kingdom of Spain and the Republic of Italy - has experienced difficulty in raising funds. This policy is grossly irresponsible.
And the borrowings - all of them - taken up on international markets to fund those loans represent a risk to the UK. If the EIB cannot repay them out of its own resources, it can call on all of the remainder of Britain's subscribed but uncalled capital. David Cameron's posture perpetuates that of successive governments: to exercise no control over the EIB or its lending policy, nor over the degree to which the UK is put further at risk.
Bob Lyddon is a management consultant specialising in European Banking and author of the Bruges Group report The UK's risks and exposure to the European Investment Bank and other financial European mechanisms: amounts, safeguards and breaches in the dyke
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