A long-term dream
Philippe Maystadt, former Belgian finance minister and European Investment Bank (EIB) president, recently fleshed out the European Commission’s policy paper to promote long-term investment.
Is it the path to bring institutional investors long-term returns, and the cure for dismal economic performance?
Whatever the view, Maystadt’s remarks are a sign that the Commission may be taking a nuanced line that recognises the need to promote growth. Maystadt said policy makers must achieve a delicate balance between two extremes.
On the one hand is the overall financial policy argument in favour of total financial stability. This, he said, could be unworkable. The alternative would be taking excessive risk to foster economic recovery.
Maystadt suggested looking at the combined effect of all this new financial regulation.
Taken together, the cumulative impact could be greater than the effect of the rules taken in isolation.
He also referred to evolving accountancy standards – notably, Maystadt was recently appointed by Commissioner Barnier as “special adviser” to the Commission “to enhance the EU’s part in promoting high-quality accounting standards”.
Now honorary president of the EIB, Maystadt also outlined the principle behind the Commission’s proposed project bond initiative for infrastructure investment.
He said that guarantees could come from the Commission itself, and the EIB. The basic theme was to solve the need to attract long-term institutional investors, such as from pension funds, to invest in infrastructure projects.
A company issuing a bond, perhaps for an infrastructure development, needed to ensure that the paper met the credit rating required by investors, such as pension funds. In practice, many pension funds only buy bonds meeting a certain rating, such as AA. The EIB would take a subordinated, residual tranche, to support the rating.
Maystadt noted that the interest received from institutional investors, was under the provision that any new prudential rules related to Solvency II had to be set so as not discourage the plan.
He repeated a Commission position that it asked the European Insurance and
Occupational Pensions Authority (EIOPA), to investigate whether the calibration requirements of project bonds should be adjusted so that there is no regulatory bias against this long-term financing. EIOPA is due to report by June.
Maystadt outlined how the plan could apply not only to pension, and insurance funds, but, perhaps, mutual funds, and private equity.
He also described the potential total of funding as “huge”. Such investors held assets totalling around €13.8trn, he said.
No doubt with project bond investment in mind, he questioned whether mark-to-market principles should be applied to all assets independently of their business model, and regardless of their nature.
While it could augment transparency to financial information, it could be detrimental to investors whose business model was based on buying and holding assets. “Standards setters cannot ignore the economic consequences of their decisions,” he commented.
As for the financing of small and medium-sized companies, the technique of securitisation via prime collateralised securities (PCS) could offer an opportunity to channel European savings towards SMEs, he said.
But the project-bond pot of gold to put life into the EU’s economy would not be the first such EU dream. The 2000 Lisbon Agenda, that aimed to make Europe the most dynamic economy by 2010, was a spectacular failure.