Deleveraging is the mantra for most European banks these days, but not for Werner Hoyer.
Hoyer, the president of the European Investment Bank, is getting ready to ramp up lending and borrowing following a June agreement on a €10 billion ($13 billion) capital increase at the Luxembourg-based development bank. At a time of widespread recession and austerity when Europe needs growth to overcome its debt crisis, “we are the solution,” he told Institutional Investor in an interview at the IMF-World Bank annual meetings in Tokyo.
The 27 European Union member states that own the EIB are expected to ratify the capital increase by the end of this year, which will increase the bank’s annual lending capacity to some €68 billion a year from €48 billion currently. “This is quite significant in an environment which is not easy,” says Hoyer.
The increased capital has solidified the EIB’s triple-A rating, ensuring that the bank — one of the largest international borrowers — should be able to continue to tap the capital markets efficiently to finance its growing activities. The EIB has already fulfilled its borrowing needs this year, raising nearly €65 billion, and it expects to raise more than €70 billion in 2013. The bank raises roughly half of its funding from outside the EU, and Hoyer took advantage of the Tokyo gathering to meet with some of his key investors, including senior officials from the State Administration of Foreign Exchange, which manages China’s foreign reserves, and the Bank of Japan. Hoyer, an economist by training, was a longstanding liberal member of the German Bundestag who served as the country’s European affairs minister before succeeding Belgian Philippe Maystadt at the EIB in January. His appointment reflects the growing clout of Germany, the EU’s paymaster, inside European institutions.
Germany is often criticized for enforcing austerity on Europe, but Hoyer is determined to use the €472 billion-in-assets EIB to stimulate investment and growth. And he vows to apply German rigor to the task. “We need to be extremely prudent in our project decisions and lending decisions because we are under constant scrutiny of the markets,” he says.
One key priority is to increase lending to small- and medium-sized enterprises (SMEs) that have been hit hard by the deleveraging of commercial banks. The EIB extended €13 billion in credit to some 120,000 SMEs in 2011, and it expects to increase lending to nearly €20 billion this year.
The bank typically acts as a catalyst by lending in conjunction with other public- and private-sector lenders, usually on a 50-50 basis; but in hard-hit crisis countries such as Greece, the bank can provide as much as 80 percent of the funds in SME loan facilities. Yet Hoyer is quick to emphasize that the bank will remain an active lender in all EU countries, and won’t become an indirect bailout mechanism for euro area periphery countries. “We are the bank of the 27,” he said. “We are not the bank for the weakest of the 17.”
The EIB is also getting ready to launch its so-called project bond initiative, which Hoyer sees as critical to sustaining Europe’s ability to invest in major transportation, energy and broadband infrastructure projects at a time when public budgets are strapped.
Under the initiative, the EIB will use its rating to provide credit enhancement to private-sector project financings rather than lending directly itself. The bank is seeking to sign its first such enhancement before the end of the year as part of a pilot program. Hoyer believes the bank can provide enhancements on some €5 billion in project financing by 2014. Activity could pick up strongly after 2014, when the next seven-year EU budget — which will emphasize infrastructure investment — takes effect.
“We are the catalyst to bring private funding into these projects,” Hoyer said. “If it works in the pilot phase, it will become a large sum of money.”
Hoyer’s activism may not win Germany any love on the streets of Athens, but his innovative use of the EIB’s financial muscle provides some much needed optimism for the European economy.
