Markus Berndt is an admirer of Mia Mottley, Prime Minister of Barbados. She is the architect of the Bridgetown Initiative, a blueprint for reform of an international financial system that Mottley has described as broken, outdated and “infested with short termism”.
Berndt, acting managing director of EIB Global, the European Investment Bank’s new branch for investment outside the European Union, says the EIB is in full agreement that reforms must be accelerated if the international community is to mobilise the funding required to tackle the twin challenges of climate change and global social underdevelopment.
But he rejects the charge of risk aversion that has often been levelled at the EIB, arguing that this is an outdated perception.
“The EIB is the most leveraged of the multilateral development banks, which has meant that it has had to maximise the use it can make of its capital,” says Berndt. “We have done so by developing a vast array of instruments across the entire risk spectrum. Today, we are one of the very few global financial institutions that can provide solutions ranging all the way from the most risk-free senior loans down to subordinated structures, equity participations and portfolio guarantees where we take the first loss.”
The EIB is rightly adamant that it draws the line at any exposure to risks that would undermine its capital position or its triple-A ratings. This would potentially jeopardise a funding model that has consistently positioned the EIB among the world’s most highly regarded and dependable supranational borrowers.
Appetite for risk
But Berndt says that this model need not be synonymous with risk aversion: “Good banking is all about taking risks and pricing them appropriately. This is precisely why we have invested massively in the design of instruments allowing us to take more risk by leveraging our budget guarantees.”
A striking recent example of this, he adds, is the EU for Ukraine (EIB EU4U) Fund, an initiative backed by 16 EU countries which have pledged €400m in support of Ukraine’s agenda for recovery and reconstruction. “This is an example of a fund that allows us to take guarantees as well as grants from member states,” Berndt says. “This in turn means we can leverage our balance sheet to crowd in private sector support.”
Where the EIB makes no apology for remaining cautious is in its approach to project implementation. “It is true that when it comes to social and environmental standards, we remain risk-averse,” Berndt says. “We believe it is good practice to use EU standards as a way of encouraging private capital to be crowded into projects, irrespective of whether they are in the EU or in less developed economies.”
The EIB’s response to the crises highlighted by Prime Minister Mottley has been to share its expertise on how to leverage its capital, while exploring innovative mechanisms to support the battle against climate change in developing economies.
Specifically, Berndt points to four proposals aimed at increasing efficiencies in financing climate mitigation and adaptation projects.
The first is introducing longer tenor sovereign loans of up to 30 years (with a 10 year grace period), more closely aligning the financing of projects with the economic life of the assets.
The second is integrating climate-resilient debt clauses into contracts for less developed countries and small island developing states, allowing for the temporary suspension of debt repayment in the event of a natural disaster.
The third, which the EIB is developing in co-operation with countries such as Barbados, is the use of debt-for-nature swaps. These could allow sovereign borrowers to exchange some of their international debt and invest any savings from this for climate action commitments.
The fourth is exploring options for reallocating special drawing rights under the International Monetary Fund’s Resilience and Sustainability Trust, as a means of crowding in private sector investment. This has already been done for Rwanda and Barbados with EIB participation, and Jamaica is next in a line which includes several other regional partners in Sub-Saharan Africa.
Showing commitment
Beyond these initiatives, another notable indication of the EIB’s commitment to long term reform was the launch at the start of 2022 of EIB Global.
This initiative is based on a hub-and-spokes model, designed to ensure that the EIB has the local bankers, engineers, and sector specialists it needs to implement key projects outside the EU.
EIB Global’s first regional hubs have already been opened in Nairobi, Belgrade and Abidjan and others will follow in Africa, Eastern Europe, Asia and Latin America. “We’re already seeing from our regional hub in Nairobi what a difference it makes to have a local presence,” says Berndt.
Berndt says it is a mistake to interpret the EIB Global initiative as a rebalancing of the geographical distribution of its loan portfolio. The lion’s share of this has historically been in Europe, with €10.8bn invested beyond the EU in 2022.
More significant, he says, is the role EIB Global plays in underscoring the EIB’s commitment to building international partnerships, across a world where economies are inescapably interlocked — just as it did in helping to distribute around two billion BioNTech vaccines throughout the world during the Covid crisis.