It is just six months since I last spoke with Andrew McDowell, the Irish economist who serves as vice-president of the European Investment Bank (EIB). But, as the economic damage from the Covid-19 epidemic deepens, six months is a lifetime.
When we last spoke, McDowell explained how the EIB, primarily known for financing large scale infrastructure projects, was broadening its reach to finance innovative, high-potential business, particularly those in the green economy. The EIB had spotted a funding gap for mid-sized European companies and was beginning to use its reservoir of cheap funding to develop European industry.
“We are able to do a lot more smaller deals with first-time clients, particularly those investing in intangible assets,” McDowell told me in November.
That was then. This is now.
In recent weeks, the bank has been forced to turn its pre Covid-19 business plan on its head, and quickly reframe its priorities. McDowell now tells me that it still wants to support innovation and the green economy, but the immediate – and urgent – priority is getting funding and liquidity into the European SME and corporate market.
“There is an emergency. It is about the survival of European industry through the crisis and we will play our part and put our balance sheet in play to try and make that happen,” McDowell told me on a call from Luxembourg this week.
The announcements from the EIB have been coming thick and fast, and as the crisis has escalated, the numbers attached have become ever larger.
On March 18, it was announced it was “rapidly mobilising” and was making €40 billion immediately available to target health and economic crisis effects. This comprised a €20 billion bank guarantee scheme, a €10 billion asset backed security scheme and a further €10 billion in working capital liquidity for SMEs.
“That is a repurposing of our business plan. We can fit it into our existing capital availability, and it is fine. We can digest a package of that nature without too many problems,” he says.
But the EIB wants to go much bigger, and truly unleash its resources to aid the crisis. The EIB now plans to create a €25 billion guarantee fund to enable the EIB Group (which includes the European Investment Fund) to scale up its support for companies in all 27 EU Member States up to an additional €200 billion.
“It is hugely challenging, but everyone is doing their best to try and use the instruments we have available to us – and to use them quickly.”Andrew McDowell
Essentially, the bank intends to deploy a hefty €25 billion of its own capital, which will then be leveraged up to €200 billion. To put the €25 billion into context, the bank normally puts up capital of between €3 and €4 billion each year to support a €60 billion annual plan.
“We will be at the pin of our collar implementing it alright. This is a big, big operation challenge for us to implement a package of this scale,” McDowell says.
The proposal was discussed among eurozone finance ministers yesterday, and, if McDowell and his colleagues have their way, it will be rolled out immediately through its network of affiliated lenders – some state owned, banks like the SCBI in Ireland, and others commercial partners.
“It is hugely challenging, but everyone is doing their best to try and use the instruments we have available to us – and to use them quickly,” he says.
This is not Andrew McDowell’s first financial crisis. As chief economic adviser and head of policy to Enda Kenny for much of his time as Taoiseach, he was central to a government forced to implement austere tax increases and spending cuts.
McDowell was appointed one of the organisation’s eight vice presidents in 2016, becoming the first Irish member of the bank’s management committee in 12 years. His brief is wide-ranging: McDowell is responsible for a number of countries such as Ireland, and also sectors such as energy and the bioeconomy.
He believes that this is a different crisis to the last one – the banks are in a better place financially and there are fewer macroeconomic imbalances across the European Union. But McDowell still believes that the current lockdown will have significant consequences for business.
It is why the EIB is determined to aid the effort. Normally, it requires clear evidence of innovation for corporate funding and prefers long term projects. These criteria will be changed to facilitate more companies with shorter term funding.
The EIB, based in Luxembourg and owned by the EU member states, is the world’s largest multilateral lender, advancing €55.6 billion last year. Highly profitable and with an AAA rating, it accesses cheap finance on the market, before lending it on to projects and businesses that support its policy goals of innovation, infrastructure development and, increasingly, climate action.
It signed deals worth €1 billion in Ireland last year, a new record, and McDowell says Ireland will be a big beneficiary of the new Covid emergency response.
In his interview, the economist discusses the balance between hibernating and rebooting an economy, as well as the help that the bank can give cash strapped Irish businesses. He also talks about what the Irish economy will look like post-crisis and the impact on specific sectors such as commercial property and retail.
We began by looking at how the EIB had changed its priorities in recent weeks to respond to the current crisis.
Ian Kehoe (IK): The last time we spoke, the conversation centred on investing in new technologies, new innovative companies and in climate change. The world has changed in the last number of weeks. What has been the reaction of the ECB? Does it see a change of its mandate now? Where does it fit into the European response?
Andrew McDowell (AMcD): Obviously like every European institution, we are turning our pre Covid-19 business plans on their head and changing our priorities. Going into this year, our strong emphasis was on innovation and climate. They were our two top priorities. That was reflected in our business plan for this year. We were still doing other lines of business and reflecting those priorities in our other lines of business – SME finance, corporates, public sector and so on.
Now, with the crisis, we are turning all of that around and focusing very much on SME financing, and liquidity and funding support for SMEs and corporates. To the extent that we can still align that business with innovation and climate, that is great. But we are not pushing as hard as we would have before on our beneficiaries to demonstrate that alignment.
There is an emergency. It is about the survival of European industry through the crisis and we will play our part and put our balance in play to try and make that happen.
Already Europe is starting to look at the post crisis recovery roadmap – the plan to rebuild the economy. Then we want to put climate back on the agenda again. Let’s not just rebuild what we had, let’s rebuild something better.
IK: And what can we expect in terms of the EIB’s financial commitment to the effort?
AMcD: We have already announced a €40 billion package.
IK: That is the 20-10-10 package announced in recent weeks?
AMcD: Yes. A guaranteed package of €20 billion for what we can call capped and uncapped guarantees. And then an asset backed securitisation package of €10 billion and then a funding programme for the banks of another €10 billion.
That is a repurposing of our business plan. We can fit it into our existing capital availability, and it is fine. We can digest a package of that nature without too many problems – even though a lot of our existing customers are in a lot of difficulty and we have to give capital to them as well.
But we want to do something much bigger. European finance ministers have discussed a bigger package for the EIB – a €25 billion guarantee fund for the EIB that we can use to mobilise about €200 billion in funding for SMEs and corporates.
It is part of a wider economic response – it involves ourselves, the ESM in terms of funding support to Eurozone sovereigns for health related funding and then also re prioritising the commission’s budget so it can be disbursed much more quickly from the commission’s budget.
We have this new idea as well of a sovereign lending scheme for unemployment, for short term employment retention schemes to limit the rise in unemployment.
IK: It is a massive package overall – and quite an extension of the EIB’s capacity.
AMcD: We will be at the pin of our collar implementing it alright. This is a big, big operation challenge for us to implement a package of this scale. Normally, we would deploy about three or four billion of capital every year to support a €60 billion plan a year. That is about €4 billion of capital that you consume with that amount of financing. This would be a €25 billion business plan in one year, because we would be deploying €25 billion in member states’ capital to underpin these operations.
It is hugely challenging, but everyone is doing their best to try and use the instruments we have available to us – and to use them quickly.
“We don’t have to reinvent the wheel. What we may have to do is broaden the eligibility criteria.”
IK: And how does the money filter down? There is a huge liquidity squeeze with cash flow drying up for lots of companies. How do you get it to them?
AMcD: We will work with national governments to complement national guarantee schemes and significantly expand the scope and power of national guarantees schemes by us taking some of the risk. That is probably the main mechanism.
In Ireland, the main deliverer of national guarantee schemes will be the Strategic Banking Corporation of Ireland (SBCI). We are in discussions with the Irish government about how we can combine forces – both with our existing instruments under the €40 billion package and also to a greater extent for this €25 billion guarantee fund.
Compared to the crisis ten years, when there was no national promotional bank – you had the commercial banks – but there was no state intermediary who could structure these programmes.
Now, we have the SBCI. It has been built up to be a very professional counterparty to the EIB in Ireland and it is the main delivery mechanism for EIB funding and guarantees for the SME sector. The good news is we already have a lot of schemes with the SBCI – we have done three credit guarantee schemes in the last three years with them covering about €1 billion of loans. The mechanics are there. We don’t have to reinvent the wheel. What we may have to do is broaden the eligibility criteria.
IK: I have looked at some of the criteria for previous schemes. There are a lot of innovation requirements.
AMcD: We may have to dilute that a bit. Normally, we are pushing longer term investment finance. Now, it is about working capital. We can increase the guarantee rates because 50 per cent is not that interesting to the bank anymore – they want 80 per cent or 90 per cent. We can tweak and adapt all of those things to the needs of this crisis.
But the basic mechanics are there in terms of how this will work, so I am pretty confident we can work quickly in Ireland and in other countries. This is the advantage of using the EIB for this – we have channels for deployment across Europe. We have thousands of customers, including commercial banks and national promotional institutions who we have worked with before and now we can leverage off those relationships and that history.
“You cannot stimulate an economy under quarantine. Phase two is the stimulus.”
IK: There are two big issues. The first is trying to put the economy into hibernation. The second is trying to kickstart it again. Both cost money. You have a role across both.
AMcD: There is phase one and phase two. What we have been discussing up to now is all phase one. It is keeping as many firms alive as possible and trying to keep intact the productive capacity of the European economy while in hibernation.
Avoiding mass bankruptcies is key. It is an unnecessary costly outcome. Whereas if you can keep as many firms alive as possible you can probably reboot the economy more quickly than otherwise. That is all phase one.
Phase two is going to be a stimulus. What we are talking about now is not a stimulus. You cannot stimulate an economy under quarantine. Phase two is the stimulus. This is why the commission is being tasked with a recovery roadmap. This is where it is going to be about more investment and less working capital, more public-private investment. This is where the ‘green deal’ will be at the centre of the recovery plans so that we don’t just recreate the existing economy but a more sustainable economy. These are nice words, but we will obviously have to see what it means in practice.
IK: What do you think the economy looks like in six months or a year?
AMcD: There are causes of concern but there are also some reasons for reassurance. One reason for reassurance is that this is very different from the financial crisis ten years ago. It is different in two respects. The first is that it is not starting from the banking sector. This is always good. The banking crisis was an absolute disaster and can destroy through a credit crunch the SME sector in particular. This is not so far, a banking crisis. Obviously, if the real economy remains shutdown indefinitely, it could turn into a major problem for the banks but they have gone into crisis in a much stronger way than ten years ago.
The other source of reassurance is that up until this point there were no major macroeconomic imbalances, particularly across the European Union, in the same way, that there was 10, 15 years ago. There were not huge current account imbalances. In Ireland, it was quite clear in ‘05 and ‘06 that we had too many people working in construction. We probably had too many people in some services industries. We did not have enough exports.
It was the same in a lot of countries that went through either a credit boom or a construction boom. They had imbalances that meant an awful lot of jobs were unsustainable from an economic perspective. Going into this crisis that is not so much the case. The economies of Europe, after ten years of adjustment, were reasonably well balanced. You did not have as many fundamental problems.
The worrying part is that the economy will not be turned on overnight. We look ahead and we feel that travel will take a long time to come back. There is going to be some structural changes in patterns of demand as a result of the crisis. It is hard to see a lot of services industries coming back straight away. It is going to take time and confidence to rebuild. This is all going to be linked with developments in the health sector – how quickly are we going to be able to get to a situation where everybody feels free to consume in ways they did before the crisis. It is not entirely clear.
The second concern is the debt. There is going to be a debt from the crisis. Shutting down the economy from between three to six months is going to create a significant increase in private debt, but particularly public indebtedness. That is worrying because, in Europe, levels of indebtedness were still extremely high going into this crisis. This makes the financial system and economic system more fragile. This is going to be the concern for the next five years – how do we manage the huge increases in debt that have taken place as a result of this crisis.
We have to push liquidity and funding into every economy that we can right now. But there is going to be a reckoning at the end of it.
We can see the debates that are taking place in Europe when the crisis is over – how are we going to share that increase in indebtedness or at least ensure economies. This will be a very difficult discussion.
IK: And a very ideological one.
AMcD: The EU so far has not covered itself in Europe and the old debates between debtors and creditors have remerged. But let’s see what happens.
IK: Different sectors will recovery at different times – this will be a drawn-out recovery.
AMcD: Look at the corporate real estate sector. There will be a lot of corporations looking at the real estate requirements in the future – literally looking at their physical requirements. They have learned things during this crisis. They have learned that they do not need so much space.
Event management – large organisations will have decided not to hire physical locations for events anymore. It will go online.
As well as demand for certain types of good coming back at different stages during the health normalisation, I think you will have longer structural changes in demand as well – including certain big parts of the economy that will be struggling to make their value case after this crisis.
“We are intending that Ireland will be a big beneficiary of whatever we do in terms of our Covid-19 response.”
IK: Lets go back to phase one for a moment. You will be working with partners in relation to the economy and the hope is that it trickles down to the companies that need it.
AMcD: For SME financing we always work with financial intermediaries. We will also expand our direct corporate financing programme. So, that is money that goes directly from the EIB largely to corporates.
IK: I know you have given money to Devinish and Nuritas in the past.
AMcD: We will do more of that. We will also be supporting existing clients to a huge extent in terms of their liquidity needs. But SMEs have always worked through intermediaries – both state owned and commercial banks. That will continue to be the case. We are well used to designing them in such a way that the benefit gets through to the SME. We always have conditionality and reporting requirements on the interest rates, the conditions and so on, and they have to supply the names of the SMEs that are being supported. We don’t give banks money without them telling us literally the names, the size and the purpose of the beneficiaries of our money.
IK: Are you capping it by region?
AMcD: There are no quotas. It will be on an application basis. So, it will be wherever the demand is greatest and wherever we can deliver the biggest impact. We will always have upper exposure limits, but no minimum quote. This is the way the EIB always does its business.
IK: You mentioned something at the start that I want to end with. This is an opportunity to rebuild the economy in a particular manner – particularly around climate.
AMcD: We are beginning to pick this up from a number of member states – they are working on their stimulus and they want the green economy to be at the heart of that stimulus. We would be encouraging Ireland to do the same thing.
IK: Do you think Ireland will benefit much from EIB Covid funding?
AMcD: We are intending that Ireland will be a big beneficiary of whatever we do in terms of our Covid-19 response. We had our best year in Ireland last year, signing for more than €1 billion. We have a good base and a good foundation to build even further for the future.