11/10/2013: In Europe, as usual, everything is a legal fudge...

Remember the EU 'Project Bonds' idea? Ok, the premise sounded great - you are a sovereign in an economy that can't raise funding for much of big ticket infrastructure etc building. You go to the markets with a sovereign guarantee to cover the shortfall on a specific project returns, plus a sub-guarantee from the EU... More precisely, here's how the scheme was designed to work:

The Guarantors of project finance were supposed to be: European Investment Bank (EIB) and the national governments. These were supposed to supply 'credit enhancements' to debt issues that covered two tranches: senior debt and subordinated debt. The sub-debt (or Project Bond Credit Enhancement, PBCE) were to take a form of an EIB loan backed by EU Commission, to be issued to the promoting entity at the onset of the project financing. Or it could take a form of a contingent credit line 'drawn upon if the revenues generated by the project are not sufficient to ensure debt service'. The PBCE was supposed to underlie the senior debt and act as credit enhancement for investors. The promoting entity were to issue actual bonds - in other words, project owner was to do so, not the EIB or the Member State. The EU conditioned the scheme that the 'support will be available during the lifetime of the project, including the construction phase'.

According to the original plan (see http://www.eib.org/products/project-bonds/):

"The proposed mechanism of the initiative will:

1. have a maximum size of individual transactions of up to the lower of EUR 200 million or 20% of credit enhanced senior debt;
2. as subordinated debt, target an up-lift of the project rating to A-AA rather than AAA;
3. be based on the EIB’s capacity to deliver subordinated loans, not necessarily its rating;
4. only target the EIB’s core business, i.e. infrastructure financing;
5. only support robust projects
6. benefit from the EIB’s proven due diligence, valuation and pricing methodologies."

The first project approved by the EIB for investment was the Spanish Castor offshore submarine gas storage facility. This has now failed due to lack of proper technical oversight in design (insufficient seismic risks evaluations), clearly putting into question the claims (v) and (vi) above.

Furthermore, the Spanish Government is now attempting to exit its contractual guarantee obligations, just to make sure that the entire Credit Enhancement Mechanism is exposed as a total farce.

Details are here: http://www.euractiv.com/euro-finance/eu-project-bonds-may-see-value-d-news-531021?utm_source=EurActiv%20Newsletter&utm_campaign=5ff216b9d6-newsletter_daily_update&utm_medium=email&utm_term=0_bab5f0ea4e-5ff216b9d6-245613326

All of which just goes to prove that in Europe, Government guarantees are worth about as much as the paper on which they are written... Enhance that, if you want.

7/8/2012: Once forgotten Growth & Jobs Plan

So, by now we all have forgotten that little bit of June-July newsflow that promised a Compact for Growth to help the EU recover from the euro area-induced depression. And for a good reason - whole thing was a complete fudge. The problem is - this was supposed to be the second half of the EU policy equation. If the entire half of that equation is really a pure fake, what confidence can we have in the validity or sustainability of all other euro area commitments delivered at the last summit of June?

Answer - none.

Now, here's the reminder of the June 'growth fudge'. Alongside the euro area council, the European Commission singled out the European Investment Bank as the core instrument for stimulus measures - which in reality, given EU Commission's total lack of economic policy imagination amounts to public works and infrastructure investments. On July 31, the EU Commission issued a paper covering EU construction sector and calling for the sector to become the core driver of its grandiose scheme to kick-start the euro area economies. Let's keep in mind - the construction sector accounts for just about 10% of total GDP in the euro area, while being responsible for the lion's share of total losses in the euro area banking sector and for the majority of debts in the private sector that currently hold the economies of the euro area hostage.

Back on June 30th, the EU agreed a 'new' stimulus package worth €120 billion - the Growth and Jobs Pact. This 'new' measure, of course consisted of €55 billion of already allocated in the budget, but will be diverted from such worth-while activities as building EU's 'social(ist) / green / nano / smart / knowledge-filled economy' to EU's 'bricks-and-mortar economy'. Of the remaining €60 billion, only €10 billion will come from actual funds, which will be 'leveraged' by EIB (read: more debt) to raise up to €60 billion in funding which the EIB can then lend out to the 'struggling' economies for the purpose of building 'stuff'. There's a problem, Roger, as some would say. Last year, EIB has managed to lend out just €61 billion on the foot of raising €76 billion. In other words, apparently, EIB sees not enough worthwhile investment opportunities to allocate funds it already has. Back in 2010, EIB lent out €72 billion. But with the EU Commission plans, the bank should simply double its lending overnight. 

Despite the fact that by EIB's own admission (see annual report) the levels of lending in 2010 were 'exceptional' and the bank would like to return back to 'normal' lending volumes.

Recap the above: EIB is already lending at 'exceptional' levels and would like to scale this lending back, and EIB would have to double its lending capacity to deliver on EU Commission plan.

Now, what can possibly go wrong with this?