EU leaders back use of structural funds to boost lending to firms
BRUSSELS, June 27 (Reuters) - European Union leaders agreed on Thursday to use the EU's structural funds to boost lending to companies in an effort to kick-start growth, mainly in recession-blighted southern Europe.
Finance ministers will choose next month between three options put forward by the European Investment Bank (EIB) and the European Commission to generate between 55 and 100 billion euros of new loans.
The EU is desperate to ignite growth in Greece, Cyprus, Italy, Portugal, Spain and Slovenia so they can pay back their debts, but banks trying to shore up their damaged capital bases are proving reluctant to lend to enterprises.
The hope is that by helping the banks to provide more and cheaper credit, firms in these countries will step up hiring and production so that economy picks up steam again.
As it stands, a company based in the south can pay three or four times the interest that a competitor in the north would pay for the same loan. For example, at recent interest rates, a Cypriot firm will pay 70,000 euros for a 1 million euro loan, while a French one might pay only 21,000.
The Commission and EIB would aim to leverage only around 10 billion euros of EU funds to attract a much larger flow of credit from private investors, mainly banks.
"The European Council ... agreed on the ... expansion of joint risk-sharing financial instruments between the European Commission and the EIB to leverage private sector and capital markets investments in small and medium-sized enterprises (SMEs)," the leaders said in a draft statement.
"These initiatives should ensure that public support significantly expands the volume of new loans to SMEs across the EU."
The chosen scheme is to be deployed from January 2014 an the leaders asked their finance ministers to decide on July 9 which of the options it would be.
The first possibility is that three-quarters of the money would be used to provide guarantees amounting to 50-80 percent of loans.
The remaining quarter would be used to guarantee batches of loans to companies sold as Asset Backed Securities (ABS). The ABSs would be built only of new loans that met quality criteria set by the EIB and the Commission.
This option would generate lending of 55-58 billion euros.
The second option would be to guarantee both new and existing portfolios of loans when they are securitised, but with limits for each country; for example, portfolios of Spanish loans would be guaranteed by Spain's share of the 10 billion euros, as determined by its quota of EU structural funds.
Banks would then have to extend new loans to firms equal to the amount of ABS from new or existing loans that they sell. This would generate an estimated 65 billion euros of lending.
This would be a more troublesome option because banks would try to sell bad loans in one package with good ones, and checking each loan individually would require time and effort for the EIB, raising the cost.
Under a third option, the guarantees would not be allocated by national quotas but pooled.
This last option would generate lending to companies of around 100 billion euros, and reach around 1 million of the small and medium-sized companies that generate most of the EU's growth and jobs.