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As a financial instrument, Jean-Claude Juncker’s new investment fund is very clever. As an economic measure, it will not work.
The president of the European Commission hailed his €315bn investment programme to revive the eurozone as “an ambitious and new way of boosting investment without creating new debt”.
It is certainly new, and reminds me of a product that was briefly popular in the credit bubble of the past decade: a synthetic collateralised debt obligation – a horridly complicated instrument where the underlying assets were not real. It was an attempt to get from nothing to something.
I have no problems with structural finance if it can be applied to a useful social purpose, as in the case of Mr Juncker’s fund. My objections are practical, not fundamental.
This is the plan: the commission starts off with €8bn within its existing budget. It sets aside that money as collateral for a guarantee of €16bn. The rationale underpinning this leverage is that not all the projects will fail at the same time so you can guarantee more than you actually have. Fair enough. The European Investment Bank adds another €5bn to this guarantee. Up until this point, I am not worried. The EIB is a conservatively managed institution with plenty of buffers. The EIB could use the €21bn to raise some €60bn in cash by issuing bonds. That would be a second layer of leverage. The air is getting thinner, but I am still not that concerned. It could then use the €60bn to co-finance €315bn in investments from the private sector. At that point, the original €8bn will have been levered three times and by a total factor of almost 40.