I made a presentation at the IES-IREF Summer University in Aix-en-Provence about an aspect of my book, ‘The shadow liabilities of EU Member States, and the threat they pose to global financial stability’.
The relevant aspect is the build-up of off-balance sheet financing through the InvestEU programme, for the declared purpose of achieving NetZero.
NetZero is a convenient flag under which to fly, as it legitimizes what the European Investment Bank and the European Investment Fund want to do more of, and can be positioned as an imperative.
Using the InvestEU template, it should be possible for the EIB and EIF to enable the build-up of €1.7 trillion of debt by the end of 2027, all of which tracks back onto the EU citizens for repayment, one way or another.
The EIF’s role is to take the highest risk position in the financing of a project; the EIB’s role is to take the second highest risk position. This enables the other participants in the project to generate risk-free returns, including the nominal owner or equity investor, whose injection of money is minimal and can be recouped via management fees and other supplies well before they need to worry about dividends or capital gains.
The vast majority of the debts – lent into a series of privately-owned, project-specific companies – do not register on any public sector balance sheet, as the public’s debt service commitment sits within a long-term, irrevocable commercial contract to buy the offtake from the project.
The EIB will have to put about €230 billion onto its balance sheet: its loans to the privately-owned companies.
The member states ought to record at least the €65 billion of contingent liabilities due to their expsosure through the European Union and the EIB (the EU and EIB own the EIF).
But Eurostat does not capture these contingent liabilities, still less any of the debts, which the lenders of the money account for as public sector risk but which is not lent to an entity counting as within the scope of ‘General government’.
The EIF goes one stage further: it does not even state the total nominal value of its contingent liabilities: these arise through Guarantees Issued and the delphic Equity Commitments.
You can download the slidedeck here.