INTERNATIONAL BANKING FORUM 2013 Brescia, 13-14 June 2013 Markus BERNDT Head of Division, Policy + Strategy, Economics Department European Investment Bank m.berndt@eib.org Economist for Italy: Luca Gattini, l.gattini@eib.org
Crisis and recent developments: real economy Changes in EU real GDP and components (Index, 2007 = 100) 105 100 95 GDP Domestic demand 90 Investments* 85 80 2007 2008 2009 2010 2011 2012 2013 2014 * Gross fixed capital formation Source: Eurostat, May 2013 Growth rate of investments* 15% 10% 5% 0% 5% 10% 15% 20% 2006 2007 2008 2009 2010 2011 2012 2013 2014 CY, GR, IE, IT, MT, PT, SI, ES All other eurozone Non eurozone US * Gross fixed capital formation Source: Eurostat, May 2013 2
Crisis and recent developments: real economy Investment rates in the EU per cent of GDP 29% 27% 25% 23% 21% 19% 17% 1995 1997 1999 2001 2003 2005 2007 2009 2011 EU big 4 EU 7 small EU Cohesion EU NMS Source: Eurostat 3
Crisis and recent developments: financials end-user lending Cross-country standard deviation of interest rates on new loans across euro area countries a) Loans to non-financial corporations (floating rate and up to 1 year) 140 120 100 80 60 40 20 0 Feb-03 Sep-03 Apr-04 Nov-04 Jun-05 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Up to 1 million Over 1 million Source: ECB. 4
EU response to the crisis The EU, and the eurozone in particular, responded to the 2009 crisis with joint actions A mixture of emergency and structural measures Emergency: to reduce the risks to financial instability and to the liquidity position of sovereigns Structural: to address long-term weakness of the current infrastructure of the monetary union Immediate response to the emergency backstops Direct support the banking system to safeguard financial stability: ECB non-standard policy measures Increased number and maturity of LTROs (long-term refinancing operations) Relaxation of collateral requirements Fixed rate full allotment 5
EU response to the crisis swap operations with major CBs Security Market Purchase - SMP Covered bond purchases programme I and II Draghi s: Do whatever it takes OMTs not utilized yet Changes in the interest rates corridor Support to sovereigns: BOP / GLF / EFSM / EFSF / ESM to finance IMF/EC/ECB adjustment programs Greece: First programme: roughly EUR 73 bn. Second programme: roughly EUR 164 bn. Purpose: (i) budget financing and debt redemptions; (ii) bank recapitalisation; (iii) debt restructuring PSI; (iv) debt buyback DBB; (v) a temporary (and returned) facility for credit enhancement of the Greek notes Access to market: 2014 Partial OSI with maturity extension 6
EU response to the crisis Portugal: Programme amount: roughly EUR 78 bn. Purpose: structural reforms, fiscal consolidation, and a financial sector (recapitalisation). Access to market: mid-2013 Partial OSI with maturity extension Ireland: Programme amount: roughly EUR 85 bn. including bilateral loans Purpose: structural reforms, fiscal consolidation, and financial sector (recapitalisation) Access to market: early-2013 Partial OSI with maturity extension Cyprus: Programme amount: roughly EUR 10 bn. Purpose: structural reforms, fiscal consolidation, and financial sector overhault Spain: Programme amount: up to EUR 100 bn. roughly EUR 42 bn. disbursed Purpose: bank recapitalisation 7
EU response to the crisis Structural changes to the Union Strengthened coordination of national fiscal policies The Six Pack: legislation governing the Stability and Growth Pact (SGP) initially approved in 1997 - significant reforms enacted in 2011 referred to as six-pack Strengthened fiscal surveillance Enforcement provisions of the SGP by adding an expenditure benchmark to review countries' fiscal positions, Introduction of an early and gradual system of financial sanctions New minimum standards for national budgetary frameworks Surveillance of both budgetary and economic policies together under the European Semester The Two Pack: Entered into force on May 30, 2013 - introduces additional surveillance and monitoring procedures for euro area Member States (MS) Establishes a comprehensive surveillance regime for euro area MS experiencing (or threatened) serious financial instability Requires MS to set up independent bodies in charge of monitoring national fiscal rules and to base budgetary forecasts on independent macroeconomic forecasts 8
EU response to the crisis The Fiscal Compact: it contained within the inter-governmental Treaty on Stability, Coordination and Governance (TSCG) It enhances further key provisions of the SGP Requires MS to enshrine in national law a balanced budget rule with a lower limit of a structural deficit of 0.5% GDP Increased role of independent bodies, which are given the task of monitoring compliance with the national fiscal rules The TSCG was signed by 25 EU MS (all but UK and Czech Republic), entered into force on January 1, 2013 9
EU response to the crisis Strengthened coordination of banking and financial sector regulation and supervision Focus on the creation of a banking Union, several steps required: Banking supervision Single Supervisory Mechanism (SSM) Common Resolution mechanism Common Insurance Mechanism deposit insurance scheme Basel III: more stringent capital rules will be implemented November 2010 G-20 e.g. countercyclical capital buffers 10
EIB capital increase: Compact for Growth and Jobs Both a structural and an emergency response: Crisis response: the European Council endorsed a EUR 10bn paid-in increase in the European Investment Bank ( EIB ) capital from MS Part of the Compact for Growth and Jobs. Comprising a range of policies aimed at stimulating smart, sustainable, inclusive, resource-efficient and job-creating growth As a result, expected lending would increase of 43% or by EUR 60bn in the period 2013-2015 This additional lending can support total investment of up to EUR 180bn (around ½ percent of EU GDP) EIB s investments remain targeted on critical levers for EU growth and competitiveness Innovation and skills; SME access to finance; Resource efficiency; and Strategic infrastructure 11
EIB total assets compared to other IFIs (EUR bn, 2012) 600 500 400 300 200 100 0 EIB IBRD IFC EBRD Source: EIB, Fitch Total exposure end-2012 EU 100% 80% 60% 40% 20% 0% Lending to Member States Total exposure end-2012 (% of GDP) EU SMEs & intermediated Other manufacturing Autom & transp equip Ref, Mining, Quarrying Agric, food Services Health,social Education Telecommunications Composite infrastructure Water, sewage Urban infrastructure Urban,inter modal tr. Other transp. Air transport Sea transport Roads, motorways Railways Energy 3.4 0 5 10 Source: EIB Source: EIB Simplified sector split Exposure end-2012 SMEs through banks EU15 EU12+1 RDI FDI & other Big 4 Small 7 Cohesion 4 Infrastructure targeting MS with higher needs EIB strengths in the crisis Increase: >40% Increased support of convergence and distressed member states Improving competitiveness through investments in research, development and innovation 60bn Baseline lending targets before capital increase Lending targets 2013 15 (EUR bn) safeguarding access to longterm financing addressing fragmentation and deleveraging Bringing forward of employment intensive economically and financially viable infrastructure investments 12
EIB lending activity in the EU Note: 2013 targets may be revised in the context of the Mid Year Review due to be approved by Board of Directors in July. The overall lending envelope target will not be affected. Source: European Investment Bank Group, Operational Plan, 2013 2015 13
Signatures in the EU and 2012 and Pre-accession region, initial targets 2013-15 EUR bn 70 60 50 40 30 20 10 Exclusive convergence and climate Urban renewal and regeneration Environmental protectiom TEN Transport Sustainable transport Renewable energy and EE Competitive and Secure Energy Knowledge economy 0 2012 2013 2014 2015 Support to SMEs Note: 2013 targets may be revised in the context of the Mid Year Review due to be approved by Board of Directors in July. The overall lending envelope target will not be affected. Source: European Investment Bank Group, Operational Plan, 2013 2015 European Investment Bank 14
Select new initiatives 1. The EIB Board of Directors approved a package of measures to increase the risk tolerance of the Bank, notably in relation to certain bank counterparts. At the same time, efficiency efforts are being implemented to simplify and shorten the lending cycle, and increased staff resources are being made available to the front offices to strengthen and further support the loan origination process. 2. The EIB has increased its lending target for Special Activities and Special Activity types of operations' to EUR 8.3bn*, EUR 6bn of which will be on the EIB s balance sheet (compared to EUR 1.8bn in 2012). The remaining EUR 2.3bn is made possible by blending EIB loans with EU funds, where the EU absorbs part of the risk of a given loan portfolio. This enables the EIB to expand activities in vulnerable and programme countries, and high risk sectors, such as research and development projects, e.g.: Project bond pilot initiative (PBI) to support the role of capital markets in financing long term infrastructure Risk Sharing Finance Facility (RSFF) Loan Guarantee for TEN Transport (LGTT). 3. The Bank has developed new security structures and products in some Programme countries, including risk sharing and credit enhancement instruments, e.g.: In Greece Structural Funds were used to set up a Guarantee Fund dedicated to EIB lending in favour of SMEs, structured on a portfolio first loss basis. EUR 500m trade finance facility for the first time to support a trade volume of EUR 1.5bn per year. 15 * Includes EUR 0.5bn for operations outside the EU
Select new initiatives 4. The Bank has also stepped up its support for SMEs through additional measures: It has increased lending targets to SMEs considerably. In 2012 signatures for SMEs increased by 18% to reach EUR 12.1bn. The 2013 target for signatures for SMEs was EUR 14.1bn. The current forecast is around 17bn.* It is developing new security structures and products (e.g. the aforementioned Guarantee Fund and trade finance facility in Greece) The Commission and the EIB are also working with the ECB to develop an EU strategy to alleviate the financing constraints for SMEs. The discussions focus on options for reviving the structured credit markets to support SME lending in particular (but not limited to) the more vulnerable Member States. Collaboration is directed at covering two dimensions (i) sufficient funding for the banking sector directed specifically to SME lending and (ii) credit enhancement of existing or new SME loan pools so as to reduce distorted credit margins and attract institutional investors in large SME loan pools alleviating important supply constraints for investments. In responding to the gap left by the withdrawal of institutional investors, the Risk Capital Mandate was reinforced and established as an open ended, EUR 7bn revolving fund managed by the EIF on behalf of the EIB. Strengthening EIF partnerships with national institutions to deliver different equity and debt solutions through a wide range of financial partners across the EU 16 * Includes EUR 1.1bn for operations in the Pre accession region
Select new initiatives 5. Complement the Commission s and Member States efforts with a dedicated "Skills and Jobs Investing for Youth" programme to help counteract high and rising youth unemployment with two components: i. "Jobs for Youth" providing SMEs with better access to finance; and ii. "Investments in Skills" providing lending to projects investing in the skills of young people, including investments in education infrastructure, training, student loans and mobility. In the context of Jobs for Youth, the EIB is exploring together with partner banks options to further increase its lending to SMEs the main employer of young people in order to support employment. The investments targeted under "Investing in Skills" include the EIB s established financing of investments in schools and universities as well as a broad range of training schemes, notably programmes that scale up and improve the quality of vocational training in Europe. The focus on jobrelated skills from secondary to tertiary education is seen as having the biggest impact on improving the employability of young people and offers the best protection against unemployment. The supported measures also comprise the support of mobility schemes for students and employees across the EU. 6. The EIB is looking at further means to strengthen its lending and advisory activities to help project delivery, speed up disbursements and real investment as well as increase Member States capacity to absorb EU resources. 17
EIB lending activity in Italy Italy - EIB's activity by sector Exposure, end-2012 Percentage 100% 80% 60% 40% 20% 0% Italy exposure: EUR 61.5bn, 3.9% of GDP Source: EIB EU IT Signature flow % of GDP 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 2008 2009 2010 2011 2012 2013 2013 estimate SMEs & intermediated Other manufacturing Autom & transp equip Ref, Mining, Quarrying Agric, food Services Health,social Education Telecommunications Composite infrastructure Water, sewage Urban infrastructure Urban,inter modal tr. Other transp. Air transport Sea transport Roads, motorways Railways Energy EU average for sign/gdp High level of SMEs lending both outstanding and flows Expected ramp-up of EIB lending in 2013 comparable to 2009 crisis Strong focus on energy and infrastructure (e.g. motorways) Expected lending for 2013 as % of GDP well above EU average 18
EIB lending activity in Italy In an economic climate demarcated by fiscal consolidation, tight financial conditions and negative growth, the EIB can: improve access to finance for SMEs and mid-caps against the background of tight credit supply; support energy and transport infrastructure to fill existing infrastructural gaps, increase cross-border inter-connectiveness and facilitate competition and exporting; increase cross-border inter-connectiveness and facilitate competition and exporting; provide much needed investment in RDI, ICT, education, renewables and water sector; improve the absorption of EU structural funds 19
Activity in the neighbourhood 20
Activity in the Southern neighbourhood neighbourhood EIB the largest IFI/DFI in terms of volumes Focus on access to finance (AtF), transport and energy Signatures 2007-2012 Cumulative (EUR m) Signatures 2007-2012 Share in sector activity of major IFIs/DFIs (percent) 21 Sources: EIB. AtF stands for Access to Finance and includes intermediated loans, loans to industry and to services.
22