Europe’s bank needs more money to fund EU recovery plan

The European Investment Bank president is demanding more money from governments if the lender is going to play a major role in the EU’s post-pandemic recovery.

The Luxembourg-based EIB is already under pressure to finance the bloc’s goals in fighting climate change. Now President Werner Hoyer is warning that his bank will need more financial resources to pump as much money into the economy as leaders hope.

“The capital side is so important because you always must be aware that this is the most highly leveraged financial institution in the world,” Hoyer said in an online interview from his EIB office. “Now we have reached a limit.”

The 68-year-old’s call could complicate the European Commission’s €750 billion recovery blueprint.

The plan calls heavily on the EIB — the world’s largest multilateral lender — not just to provide credit but make equity investments, on which Hoyer voiced doubts.

A big part of the plans aims at keeping viable companies afloat after countries locked down their economies for months to contain the outbreak, which has killed more than 125,000 EU citizens.

Governments are split on the Commission’s proposal, which suggests giving countries €500 billion in grants and the rest in loans. Austria, Denmark, the Netherlands and Sweden want all the aid to be paid back.

Leaders held a four-hour videoconference Friday to debate the package, agreeing only to address the issue again next month in person. One EU official on the video call described the meeting as “group therapy,” with countries offering more complaints than solutions.

There was no discussion of providing the EIB with more money. Governments — the EIB’s shareholders — will have to address it soon if the Commission’s plans are to come to fruition.

For example, the Commission wants to beef up its InvestEU program, which earmarks money in the EU’s €1 trillion budget for the EIB to use in guaranteeing loans to certain companies.

The Brussels executive also plans to have the EIB back private investors that are interested in buying shares in viable companies that are struggling from lockdowns. Here, Hoyer was cautious.

“Equity participation in companies is not our business,” he said in the interview Thursday. It’s “certainly not in [our] service to save big companies, which might be in the national limelights.”

“If we were a huge investment fund, that would be a different story,” he said. However, he added, “We are going to do what our member states, [the] shareholders, ask us to do.”

Cash call

In any case, EU leaders will have to grant the EIB the capital it needs to handle its recovery loans. They could be reluctant, especially considering their treasuries have doled out, pledged or guaranteed around €2 trillion in state aid to prevent mass bankruptcy and unemployment.

Finance ministers have also agreed already to provide the bank up to €25 billion in guarantees for €200 billion in loans to companies struggling in the pandemic. It’s unclear whether treasuries will agree to fork out more, diplomats said.

Meanwhile, the bank is nearing its lending limits.

The EIB currently has around €22 billion of paid-in capital and can call on EU governments for another €227 billion if needed. The lender’s statutes ban it from issuing loans that exceed two-and-half times its capital — and the lender’s portfolio is already approaching €600 billion.

“The 2.5 barrier must not be surpassed,” Hoyer said. “If the volumes are expected to be exceptionally higher [in the recovery plan] then we cannot serve that without risking the financial solidity of the bank.”

“That is not an option,” he continued. “We then need to strengthen the capital basis.”

Double digits

Hoyer’s board of governors — one per EU country, usually the finance minister — is well aware of his concerns.

The president told the board in a June 9 speech — obtained by POLITICO prior to the interview — that estimates suggest the bank will need in the billions of euros, “a double-digit figure in order to meet the EIB’s risk metrics.”

Hoyer was reluctant to give specific numbers on how much money he would need before leaders agree on a final recovery package, which won’t come before July.

“Double-digits” doesn’t mean €99 billion in cash, he said, adding that the EIB would at least need €10 billion in a mix of fresh money and callable capital. Exact figures would only be certain once there’s a deal on the table.

Even then, the EIB and the Commission face tough negotiations over the fees the bank gets for handling projects that Brussels mandates it to carry out.

Mandated projects overall are a loss-making business for the EIB. The bank wants a bigger share of the fees charged for the investments to cover its costs — especially if the recovery plan will increase the number of mandated projects at the bank.

“The overall profit and loss situation of the bank is not helped by these mandates,” Hoyer said. “Who picks up that tab?”

It’s not the first time Hoyer has issued a call for capital. Two years ago, he asked governments to replace the capital that the U.K. was to take with it when it left the EU.

Finance ministers agreed, in exchange for improved governance and oversight at the EIB. Those reforms are nearly complete, according to Werner’s June speech to the board, with the EIB close to hiring a group chief risk officer and strengthening its audit committee.

The EIB can expect demands for more reforms if it wants more money, Commission officials said, astonished at Hoyer’s demands. Spokespeople in Brussels declined to comment. Still, it’s governments that would get the final say.

National diplomats and senior treasury officials were uneasy over Hoyer’s call, especially when the funds are needed on the home front to tackle the pandemic.

One of the treasury officials said, “€10 billion or more will be very difficult … Member states need the money.”

This all comes on top of the EIB’s need for more capital to fund its climate ambitions, which include the end of lending to fossil fuel projects from 2022.

Over the next five years, the bank will increase its share of climate-friendly projects to 50 percent of its annual lending volume, with the hope of mobilizing €1 trillion in private investment by 2030.

“Everybody should resist the temptation to hide behind the virus when it comes to climate ambition,” Hoyer said, while refusing to “dwell on figures.”

“We need to think what to do and then ask ourselves to make sure our capitalization is sufficient,” he said.

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