June 25, 2013 / 3:06 PM / 7 years ago

EU ready to explore loan guarantees of up to 100 bln euros

* EIB, Commission consider 3 options of leveraging EU funds

* EU could guarantee new or existing loans and/or Asset Backed Securities

* EU leaders to choose which option is to be further developed

By Jan Strupczewski and Andreas Rinke

BRUSSELS/BERLIN June 25 (Reuters) - 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 institutions’ said in a joint report.

European Union policymakers are desperate to ignite growth in Greece, Cyprus, Italy, Portugal, Spain and Slovenia so they can pay back their debts. It was high sovereign debt that triggered the euro zone crisis more than three years ago.

The split into the more economically successful north and troubled south threatens the unity of the 27-nation bloc, and especially the 17 countries that share the euro.

The hope is that by providing more and cheaper credit to companies, firms will have the confidence to step up hiring and production so that the wheels of the economy start turning again, especially across the southern belt of Europe, which has been mired in low growth or recession for the past four years.

As it stands, a company based in the south can pay two to three times higher interest on the same maturity loan than a competitor in the north. For example, at recent interest rates, a Cypriot firm will pay 70,000 euros for a 1 million euro loan, while a French one would pay only 21,000 euros.

As a result, the Commission and the EIB, the EU’s investment bank, 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.

The joint EIB and Commission report lists three options for leveraging the 10 billion so that the total amount available to offer would be higher. EU leaders are to decide on Thursday which of the options they would like to see developed.


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, an EU official said.

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.

The latter 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, the EU official said.

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.

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