Wednesday, November 26, 2014

26/11/2014: Juncker Start: Making Sure No Lessons of the Crisis Have Been Learned

More debt, more guarantees, more bureaucrats-administered 'help for the real economy' - it's business as usual in Brussels with the new Commission's plans for a 'EUR300bn investment fund'.

Some details here:

And my comment here:

The problems, as I outlined in the comments on twitter and to EUObserver above, are multiple:
  1. The new fund is debt-financed with EU guarantees - and we already have plenty of these schemes which de facto reallocate more and more indirect fiscal power to the Commission extra the normal budgetary procedures;
  2. The new fund is going to be extremely leveraged - with a tangible capital base of EIB's EUR5 billion against EUR300-315 billion in disbursable funds (note: the EUR16 billion guarantee is hardly a form of capital). That's leverage levels in excess of Monte dei Paschi di Siena (currently at x54.31) - hardly an image of financial rude health and prudence;
  3. The new fund will have to be 'leveraged' against sovereign balancesheets at the time when these are already carrying massive debts. Of course, the EU will concoct an accounting trick to make sure the new debt is not counted as official Government debt, but we all know it will be;
  4. The new fund will be run by EBI - which is a de facto bunch of supra-national bureaucrats dressed up as bankers. How real is their concept of 'real economy' is - no one quite knows, but apparently EBI has been around during the crisis and made zero real impact so far. Shoving more money into it is like stuffing an old mare with oats and expecting it to run a race.
  5. The new fund priorities for lending will be driven by a combination of the EU Commission dreams of white elephants and national governments grey rhinos. Expect a usual policy prioritisation zoo with buzz words of 'knowledge', 'sustainable', 'green', 'smart', 'R&D intensive' etc flying around.

Signs of the above miracle are already in place. Take the 'investment committee' of the fund. Allegedly it will be composed of 'experts' from the member states appointed by the Commission. That is a double risk - politically appointed domestic experts counter-selected by the politically motivated EU officials. It is a prescription for double vacuum of independence. 

The experts will base their project assessments on the basis of commercial and societal perspectives. Have you ever heard of such criteria for investment in a 'real economy'? No, me neither.

Next, we have the targets. The fund is to focus its efforts on co-funding 'high risk' PPP ventures where private capital has no interest to invest in due to very low risk-adjusted returns.  How on earth can anyone call high risk PPPs a part of the real economy is a philosophical question for the good times. In the middle of a growth crisis, when resources are even more scarce, it is a question of who gets returns and who carries risks. Under  the 'pioneering' idea of Mr. Juncker, the public (EU and sovereigns) will carry risks, private investors will get returns (or higher risk-adjusted returns). It is about as pioneering as suggesting that the banks should be made whole on their losses using public insurance: the entire history of the current crisis is one Junckerian Investment Fund.

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