The borrowing cost on the EIB's 10-year bonds has risen to 90 basis points above the benchmark German Bunds. The yield is now closer to the borrowing costs of Spain and even Italy, suggesting that investors already suspect the bank will be used to issue "EU bonds" for rescue purposes – whatever its original mandate. The EIB, the world's biggest multilateral lender, was able to borrow for years at rates that were almost the same as the German government – or even lower – enabling the entire EU to take advantage of the Germany's credit-rating for project finance. The change has been abrupt. The bank said this week that yields had been pushed up by the avalanche of sovereign bond supply as governments around the world tap investors for $3 trillion (£2.1 trillion) of fresh money. But EIB debt has been hit surprisingly hard. Among the plans rattling the bond markets is a proposal by Centre for European Policy Studies in Brussels to convert the EIB into a vast stability fund to shore up European banks and prevent the crisis in the ex-Soviet bloc from mushrooming out of control. Daniel Gros, the group's director and an influential figure in EU circles, said EIB borrowing should be "massively" increased. "With a gearing of 4:1, the EIB could expand its loan portfolio up to €1 trillion (£890bn). It could triple its activities without any additional capital increase," he said. Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt, said enthusiasts for such plans are up against the ever attentive bond vigilantes. "This idea is never going to fly. The yields on EIB bonds could rise above the average cost of borrowing for the member states," he said. This may in fact be happening. The EIB is already a powerful – if little-known – arm of EU economic policy. Its mandate is to provide co-finance for projects that "further EU objectives". In the past this has meant anything from fish farms to airports and high-tech ventures. It uses its AAA credit rating to access cheap capital on the global bond markets, just like the World Bank. Much to the unease of its own officials in Luxembourg, the EIB is already being asked to take on an ever-greater role in Europe's rescue programmes. EU leaders agreed to beef up its capital by €67bn to €232bn in December. Lending is to rise by 30pc to over €60bn this year with extra spending on green vehicles – which some say is a disguised bail-out for the car industry – as well as energy projects and small businesses. The Maastricht Treaty forbids any direct rescue of eurozone states by the European Central Bank. There is no treaty mechanism for the sort of "EU bond" proposed by Italy's finance minister Giulio Tremonti, but the EIB could take on the role quite easily with a tweak to its mandate and little creativity by EU lawyers. Phillipe Maystadt, the EIB's president, played down talk this week that the bank was being pushed into galloping mission-creep. "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," he told Reuters. Marc Ostwald, a bond expert at Monument Securities, said the EIB has been a major casualty of state guarantees for bank debt. "There has been a massive repricing. Why buy EIB debt if you can get a government guarantee on the banks?" he said.Debt markets take fright at 'EU bond'
The capital markets have become increasingly uneasy over proposals to use the European Investment Bank as an all-purpose fireman to prop up weaker regions of the eurozone or come to the rescue of Eastern Europe.
Friday, 12 March 2010
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