According to a Reuters article, the European Investment Bank and the European Commission are working on plans to generate between 55 and 100 billion euros of new loans to companies to try to kickstart growth in southern Europe. The Commission and the EIB want to use a combination of loan guarantees and securitisation using 10 billion euros of structural funds from the EU’s next long-term budget, which runs from 2014-2020. A joint EIB and Commission report lists three options for leveraging the 10 billion so that the total amount available to offer would be higher.
The first possibility is that three-quarters of the money would be used to provide loan guarantees, with the guarantee amounting to between 50 and 80 percent. The remaining quarter of the money 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 would meet criteria established by the EIB and the Commission so as to ensure their quality. This first option would leverage the 10 billion roughly five times, generating lending to companies of 55-58 billion euros, the report said.
The second option would be to guarantee both new and already existing portfolios of loans when they are securitised, but only nationally – for example, portfolios of Spanish loans would be guaranteed by structural funds that proportionately would go to Spain within the 10 billion under the long-term EU budget. Banks would then have to extend new loans to firms equal to the amount of ABS from new or existing loans they sell. This would generate an estimated 65 billion euros of lending through a leverage ratio of one to six, the report says.
Under a third option, the guarantees would not be limited by national quotas of structural funds but pooled across the EU – for example guarantees for securities backed by a portfolio of Spanish loans could use the all the structural funds as collateral within the 10 billion. This last option would generate lending to companies of around 100 billion euros, the report said, leveraging the initial amount used 10 times and reaching around 1 million small and medium-sized companies which generate most of the EU’s growth and jobs.