Loan deal boost for enlargement

Date: 18/12/1997

By Mark Turner

THE European Investment Bank (EIB) could shortly double its lending capacity in central and eastern Europe, adding an extra 3.5 billion ecu to its loan facilities from 1998 to the end of 1999.

EU governments are expected to authorise the increase early next month in response to a letter sent by EIB directors just days after European leaders called for the launch of Union enlargement talks in March.

Traditionally, the Luxembourg-based EIB has not lent more than 10&percent; of the its total envelope to non-EU countries, where it finances projects spanning from Asia to Africa to Latin America.

This new lending facility is seen, however, as an integral part of the Union's pre-accession preparations, complementing European Commission direct-funding packages.

“This new facility would have a special quality,” said a bank official. “It would be very much aimed at financing the Union's future member states.”

EU finance ministers first called on the EIB to propose a “substantial” enlargement fund in January, after approving the first 3.5-billion-ecu tranche from 1997-1999.

At that point, it was unclear whether the money would be earmarked for all ten eastern applicants or only the top contenders.

But the bank's board of directors, which includes representatives from EU finance ministries, decided last week that the ten eastern candidates should be covered.

This decision is consistent with the Luxembourg summit's decision to start 'the enlargement process' with 11 countries in March 1998.

The new 3.5 billion will be used primarily for loans for energy, telecoms, transport and industry projects, and will focus on bringing the applicant countries up to EU standards.

The results should also help the Union's existing members complete their Trans-European Networks, which aim to create an integrated continental road, rail, telecoms and energy system.

“It is not much use having isolated parts of this network in every country. We need to ensure that all its elements are connected into one well-functioning whole,” said a bank official.

But, in another break with the past, the bank will not be able to count on the EU to underwrite 70&percent; of the capital in case of bad loans from the new pre-accession pot.

“This time round the EIB will have to find private guarantors. We have already found consortia of banks to help us in eastern Europe, such as ING or AMRO,” said a spokesman. “We cooperate with banks from the US, Germany, France and even Japan - such as Sumitomo Bank.”

Bank officials expect that this lack of public risk will be enough to persuade finance ministers to endorse the new lending fund. Although France and Spain raised some concerns that the pre-accession pot discriminated against the Mediterranean countries, it seems unlikely that this will prevent agreement.

Since 1990, the EIB has lent around 6.2 billion ecu to eastern Europe (including Albania), of which almost 2 billion has gone to Poland.

The support the bank receives from the EU has earned it a 'triple A' rating, which means that the transition countries can borrow money - usually for 10 to 15 years - at a more favourable rate of interest than from their usual creditors.

Loans must be “economically justified, financially and technically viable and environmentally sound.” Productive sector investments must also offer an “adequate” financial return.

Of the initial sum of 3.5 billion ecu earmarked for eastern Europe over 1997-1999, around 1.3 billion has already been disbursed and draft projects exist for at least another 2 billion. Bank officials are confident that the additional 3.5 billion will soon find a home. “I do not think we will have any trouble lending this money,” said one.