Bertrand de Mazières, EIB: 'all of us have to do more in times of crisis'
Bertrand de Mazières is one of the best known and most respected figures in European debt capital markets. As director general of finance at the European Investment Bank (EIB), he oversees one of Europe’s most important bond issuers, a status not only due to the amount it issues each year, but also its role as a setter of standards and benchmarks for rest of the market — in good times and bad.
Before joining the EIB in 2006, de Mazières was chief executive of Agence France Trésor, France’s sovereign debt management office. He started his career in 1982 at the French Treasury, representing the country in the US and Canada and then heading the bureau supervising and regulating banks from 1988 to 1993. He was vice-chairman of the Paris Club from 1993 to 1996 and secretary-general of France’s financial markets regulator, the Conseil des Marchés Financiers, from its foundation in October 1996 until 2003.
In recent months, the EIB has formed a key part of the European Union’s response to the coronavirus pandemic. While full-scale fiscal response at the EU level is a thorny debate, the EIB has been able to act more swiftly. In mid-March, it announced €40bn of financing for measures to keep the EU’s financial system liquid and capital flowing to small and medium-sized enterprises (SMEs) — guarantees, new credit lines and ABS purchases to assume risk.
That was just the first stage. In May, EU member states agreed to provide €25bn of extra capital, allowing the EIB to provide €200bn of guarantees to back SME lending, in an effort to encourage banks to continue providing credit without taking on too much risk of financial instability.
The EIB has also freed up €6bn for healthcare investments and is working on providing more.
Meanwhile, it is in the throes of a major strategic rethink, as it tries to implement the policy announced in November by its president Werner Hoyer, to become the EU’s ‘Climate Bank’. The first plank is already in place — the EIB’s new Energy Lending Policy — which will mean the bank ceases to finance any fossil fuel projects after 2021, except those “abated” by techniques such as carbon capture and storage or by including so-called “low carbon” gas.
But becoming a Climate Bank will mean much more than that. The EIB has committed itself to making 50% of all its lending climate-friendly, and, more radically, to aligning all its activities with the Paris Agreement. In theory that means all projects the EIB lends to should be on courses compatible with only 1.5C of global warming, which at least is likely to be interpreted as net zero carbon emissions by 2050.
Market participants and civil society groups have been impressed with the openness of the EIB’s consultation on its Climate Bank Roadmap, but some argue it needs to be more ambitious if it is to fulfil its Climate Bank mission.
The EIB is also in pole position to be made the hub for the EU’s roughly €75bn of development aid.
GlobalCapital: What are some of the most interesting things learnt from this crisis?
Bertrand de Mazières: I have seen a series of comments about crisis being also opportunities. Well, with this one, it’s going to be painful. It’s going to be hard for many people. Recognising and addressing this is more important than looking at opportunities. Operationally, the pandemic challenges the way we work. We now must take into consideration that we can work remotely, or at least apart from each other, much more. On a very technical level, it also questions the emergency fallback plans developed by capital market players: for example, what is the value of remote operational centres, or of split teams, when a virus can strike every one in every place?
In a global crisis like this one, it’s important not only to react rapidly, but to react in a concerted and co-ordinated way between governments and societies. We will not get out of it without a good level of solidarity. This is particularly true for Europe.
It’s important to anticipate the long-term consequences, and not to only be governed by the short-term impact. To create a commensurate response, we must never lose sight of the long-term consequences.
Will this crisis, in your opinion, make Europe stronger or weaker? You mentioned that more solidarity has come out of this crisis.
So far, Europe has shown it has the capacity to choose the right instruments for the immediate Covid-19 answer. What I really like about how Europe has approached this crisis, is that it took decisions to address the urgency of funding, while at the same time, not derailing from its longer-term vision. That is that Europe did not depart from the main priority of acting about climate change, which is not only an issue for our continent, but a problem for the entire world, and frankly, for the survival of humanity on Earth. Europe reaffirmed the importance of a Green Deal while it addressed the pandemic crisis. For example, during this time of the crisis, the EU taxonomy was finally approved by the European Parliament. It’s very encouraging, and telling about the strength of Europe, which it is not losing the long term vision.
Has the role of the multilateral development bank (MDB) changed due to the pandemic, or have new aspects of it been brought into focus?
I wouldn’t say that it’s changed, instead I think that actually the role of the MDB is even more visible. All these institutions are expected to play at some point a counter-cyclical role. All of us have to do more in times of crisis such as this one, and you can see that most of us have already increased the pace of our activity.
The only thing that maybe is a bit topical today is the discussion about whether MDBs should be involved in debt relief. On this question I can say that the EIB is in line with most of its peers. The current view is that MDBs’ impact is highest in providing new net financing to the poorest countries and not so much through debt relief. We can also provide more technical expertise and advice — we’re ready to do that. Debt relief is not actually something that is consistent with our business model.
One way that things have changed is that institutions such as yours have developed what we’re calling ‘Covid-19 response bonds’. What’s your view on those?
I’m supportive of it — if these bonds are actual real social, systemic sustainability bonds that are consistent with the frameworks put in place by international consensus. So, if indeed it’s a sub-form of social bonds, where the proceeds are invested into actions that specifically counteracts the consequences of the pandemic, it’s very good. This is what we did with EIB’s social bonds. We increased the eligibility of activities that our social and sustainable awareness bonds (SABs) can be invested in. We were already investing our SAB proceeds in access to healthcare, but we have added specific language directed to the Covid-19 emergency response, increasing its scope to include financing the adaptation of hospitals, the cost of additional medical staff, and the construction of emergency hospital units. These Covid-19 labelled bonds should not just finance the same things as an issuer’s normal paper. I would really object to that. But I don’t think I’ve seen that many cases of that so far during the pandemic.
You’ve established a €200bn loan guarantee facility. How’s that going so far?
It’s established in principle, under the name of the Pan-European Guarantee Fund for response to Covid-19, or EGF. We’ve got the backing of a €25bn guarantee from our shareholders. Our member states must now go to parliament to vote on and finalise the procedures. We will get almost €25bn from this guarantee. When that’s done, we plan to start in the summer.
We will work a system similar to the Junker plan, except in this case the guarantee is not provided by the Commission but by the member states directly. We will work very closely with national authorities and experts. We implement it also with the European Investment Fund and deploy a broad mix of products.
EGF is primarily targeted at private sector final beneficiaries that are high risk because of the crisis, but viable in the long term, and especially viable in the absence of the Covid-19 pandemic. The idea is to support the economy through this particular crisis, but not to support zombie firms. We won’t exclude the public sector, but it will make up minor part of the programme.
It’s something that we have to deploy over a very short period of time, because the initial investment period for operations approval lasts until December 2021, although member states have accepted the possibility to reconsider later on that this period could be extended by six months. So, it’s not small task, but when you think of it, the time frame is not very different from the Juncker plans. It’s going to be challenging but we are confident we will meet it.
And do you anticipate being the delivery mechanism for other EU level response measures?
The Commission has proposed a new emergency recovery package that’s in discussion with the member states. In this package, there is something totally new that the EIB could develop, which is called the solvency support instrument, or SSI. We are analysing and evaluating the effect of this proposal on our business plan and on our capital situation. The long-term adequacy of the EIB’s capital base is absolutely paramount for the EIB to deliver on its mission. It’s not at all inconceivable that this SSI proposal could come together with some initiative on the side of the EIB’s capital.
As you probably have seen, the EU is mulling a proposal for a jointly-financed recovery fund, which would see the European Union itself become a major borrower. From the point of view of the EIB, what do you think of this proposal and what effect would it have on your activities?
The recovery plan under discussion, and should become clearer in July, is, I think, a very ambitious plan. It definitely goes in the right direction, in terms of looking not only at the urgency of emergency measures, but also what the longer-term perspective looks like. Indeed it should involve a significant borrowing programme for the Commission itself.
If your question was about whether as an issuer myself, I was concerned about the new kid on the block and possibly a very big kid? Then not so much, not at all actually.
We think that, first of all, an increase in supply from SSAs is a default expectation of the market. I think nobody would be surprised. There is still plenty of liquidity sitting with investors. You could argue that the more supply of highly rated paper varies, the better the reference points available to the market are.
You can draw a parallel with the EFSF and ESM, they are significant issuers and their birth and development did not cause any dislocation in the markets. We also lived through the same kind of experience with the financial crisis in 2008, when governments suddenly decided to guarantee the banks and multiplied high-rated demand overnight.
What are the latest plans on creating a European climate and sustainable development bank?
I think that everybody now agrees that the EIB is indeed the EU Climate Bank, and that there’s no need for a new one. The EIB reaffirmed its commitment last November when the member states on the board approved a new energy lending policy and set up the EIB’s new ambition for climate action. We now have to increase lending to climate action from 30% today to 50% in 2025.
So, I think it’s done. The Climate Bank is there. And I can tell you that we are putting a lot of work into bringing this ambition into life, through stakeholder consultation on the EIB Climate Bank roadmap. We are working with all the parties concerned, consulting extensively.
As to the development bank, you know the EIB proposed the creation of a European Bank for Sustainable Development as a structure within the EIB group that would focus on operations outside the EU, and we consider that this is a proposal that makes sense.
We are already operating in that way. Now, within the context of the discussions with the Commission on the next multi-annual financial framework (MFF), it remains to be seen how exactly this proposal of a European Bank for Sustainable Development would be the instrument to receive EU funds. What form this will take is not yet decided.
There is some uncertainty around the adoption of the overall MFF package, but I am sure that any actions that the EIB has already implemented in non-EU countries will continue.
Our first pandemic response package in March is certainly concentrated in Europe, with €28bn going to guarantee schemes for financial intermediaries and asset backed securities purchase programmes, but we also announced in March/April that the EIB will contribute up to €5.2bn to the “Team Europe” response that now stands at around €20bn. This means the EIB itself makes up a quarter of the overall EU response for non-EU partners.
In addition to this contribution to the ex-EU initiative against the pandemic, we also announced €1.7bn to go towards aiding the recovery of the social and economic recovery of the Western Balkans as part of a €3.3bn package unveiled by the Commission at the end of April.
So, we are already largely the development bank of Europe.
So, there’s not going to be a formal launch or renaming of the institution then?
We proposed the ‘European Bank for Sustainable Development’ name to highlight the development action already implemented.
And the idea, or the unofficial proposal, of merging parts with the EBRD — that’s all off too?
I’m not aware if that’s being discussed at the moment.
Going back to capital markets for a moment. The market has proved amazingly resilient, thanks, I think, to the ECB support. Are you concerned that the market’s sensitivity to risk is being dulled and that are we storing up problems of debt sustainability in the future?
It’s interesting. When I was debt manager for France [at the Agence France Trésor], and I was issuing almost at the same spreads as any other Euro area member state, it was a time when risk awareness was dulled.
Over the last decade, the market has become accustomed to risk appetites being driven by central banks. It’s not a new phenomenon. It’s something that’s been around for some time and it’s here to stay.
Central banks are ensuring smooth monetary policy transmission, and cohesion in the case of Europe. It is true that debt levels are quite high and creeping higher. Sustainability of such debt levels is a function of many things: growth, productivity, interest rates. At the moment, interest rates are reassuringly low.
What do you say to criticism that the EIB is itself too risk-averse?
That’s something that I’ve never heard as criticism from any investor or from rating agencies either. It is true that we’ve managed risk well so far, but we’ve managed risk meaning that we have taken on risk. It is not true that to say that we are risk-adverse. It’s just that we are taking risk in a cautious way.
If you look at the Juncker plan, the idea was that after applying the first loss piece guarantee from the Commission on the new lending portfolio, EIB would get an average quality in the asset book similar to what it had until then. That’s the way EGF will work as well. This means that we do indeed increase significantly the risk bearing capacity of the EIB, but we will do that thanks to appropriate guarantees schemes.
Over the past 10 years since I joined, the EIB has considerably enlarged its toolbox. We are no longer just a senior lender, we do a lot in terms of subordinated debt, equity and risk sharing with banks. We have also increased the number of our clients.
Fifteen years ago you could have considered the EIB as always working with the same group of big clients or big projects. But it is different now. For example, we’ve developed within the Juncker Plan, the Infrastructure and Innovation Window. For this window, more than three-quarters of the clients are totally new counterparts to the EIB.
There are hopes that the recovery from the Covid-19 pandemic can be a green one. But is it realistic that countries are going to be able and willing to prioritise greening their economies, when they are just desperate to restart any kind of economic activity?
It’s what I like about Europe — it has not lost sight of the necessity. I think Europe will make the recovery about building better and not only building back to ensure the reduction of future risks and preparedness.
Many of the building blocks for this recovery approach are already in place or under development in Europe. These include the cornerstone commitment of the EU and other states to the Paris Agreement, to climate neutrality by 2050 that the member states decided to take last December, and the launch of the Green Deal to provide a comprehensive framework. Even EIB’s new energy lending policy, decided upon in last November, which attracted some concern from member states, is now well part of it all. I think it is doable, and that Europe believes that.
Taking it to the other side of the balance sheet for a moment: what effect has the pandemic had so far on the EIB loan book? Are you starting to see credit quality impaired and do you expect losses to rise?
The risk policy and the risk framework agreement remain absolutely the same, which is that the EIB group takes risks, with appropriate financial and contractual arrangements.
I think it’s also fair to say that the impact of the Covid-19 crisis on the portfolio will not be immediate. It will take a bit more time to materialise, so we will have a better idea in the second half of this year and the start of the next.
But at the moment, what I am saying is that we have not seen, and we don’t expect any meaningful change in the overall quality of our portfolio. We are closely monitoring the situation and have not yet experienced any material impact.
The initial €28bn response package announced in March has not translated into a significant changes for lending and funding volumes in 2020.
Have you granted forbearance or payment deferrals?
First of all, it is something we already do. We manage a loan portfolio of between €400bn and €460bn, and there are always cases where you have to apply some restructuring. It is not something we are philosophically or operationally adverse to. As part of our March response package to the Covid-19 pandemic, we announced that we were ready to consider on a case-by-case basis with our clients what to do if they are experiencing financial difficulties. These are borrowers that we consider fit to make it through the crisis, and we are ready to help them.
Forbearance measures may include the reprofiling of cashflows or some top-ups, but again, they are deployed on a case-by-case basis on the on the understanding that it is a short term measure.
It is important to mention that some member states have developed their own moratoria or forbearance plans and that the EIB is not concerned by these measures. Moratoria or similar measures adopted by EU member states don’t apply to the operations of the EIB. The EIB decides on its own on a case-by-case basis what to do when a client is a valid case for temporary support.
The crisis has pushed Brexit down the agenda, but it’s still happening. So how is the EIB preparing for Brexit at the end of this year?
I would say it’s already happened. We are more than ready because in fact, in accordance with the famous Article 50, the UK left on February 1, and so on February 1 the UK stopped being a member state of the EIB. We immediately got capital replacements for the same amount of the missing €3.5bn of British capital from our other member states through a conversion of reserves into paid-in capital. We did get some earlier as Poland and Romania decided to increase their share in the EIB’s capital.
The withdrawal agreement ensures that Britain remains liable to its share in the asset book as it was as of February 1, so we do have a portfolio guarantee from the UK that will amortise over the lifetime of the portfolio, up to around 2062.
I would say we are all set. We also have the commitment in principle that the UK will guarantee the continuation of the protection and regime extended to the EIB and its assets in Britain. For example, the fact that the EIB will continue to operate without a banking licence and exempt from taxation.
This is standard for the EIB, and it has the same regime in every non-EU country where it operates. Now, the only question that is not addressed is the future relationship between the UK and the EIB. In the Withdrawal Agreement, the UK inserted a mention that it had the intention to explore options for a future relationship with the EIB group. While this is part of the Withdrawal Agreement, it is not yet under discussion or implemented. I hope it will be.
The International Finance Corporation has started giving all its dealer banks a questionnaire about their ESG and sustainable activities and performance, which it plans to use as part of its selection process. I’m wondering whether the EIB might consider doing that?
It’s an interesting idea. I would answer differently, and would say that we are part of Europe, and within Europe there is a global action on climate that includes in particular requirements for the capital markets and capital markets players in terms of disclosure about climate risk in portfolios. So I would quite naturally consider that we would require our partners to apply and implement these requirements.
Finally, the EIB has expanded the projects eligible for financing under its climate awareness bonds from just renewable energy and energy efficiency to include low carbon tech, electric rail and electric buses. Why have you decided to do that?
Again, it’s pretty consistent with the European approach.
The documentation of the Climate Awareness Bonds last year aligned with the new EU taxonomy. Even if it was only recently approved by the European Parliament, it was fairly well shaped last year.
This new eligibility is consistent with the taxonomy. We have developed the proper reporting and monitoring tools to ensure that we safely invest our climate awareness proceeds into projects that do meet the prerequisites to be climate action and climate mitigation action under the EU taxonomy.