Too many hopes pinned on European Investment Bank

it works more like a sprinkler than a power hose, but the European Investment Bank (EIB) has a role to play in preventing a financial inferno from sweeping across central and eastern Europe.

The trouble is that politicians have overloaded the European Union's long-term lending arm with exaggerated expectations, calling on it like a fire brigade in every emergency, from saving credit-starved small firms to greening the car industry, combating the energy crisis and fighting climate change.

The need to serve many masters and focus on many priorities limits its impact, but the EIB now has more resources to back economic stimulus programmes in the 27-nation bloc.

Philippe Maystadt, President of the Luxembourg-based bank, has received so many pleas for billions since the credit crisis struck that he starts by listing what the EIB cannot do. It is not a central bank. It cannot provide liquidity. It cannot take equity stakes in banks and it cannot fund budgets. Its role is to finance investment projects that are aligned with the 27-nation EU's policy objectives.

"What we can do is provide finance as intensely and rapidly as possible for investment. That's what we're doing (and) we aim to do more, better and faster," Maystadt, a former Belgian Finance Minister, said in an interview.

The EIB plans to lend more than €7.5 billion (Dh35bn) to small and medium-size enterprises and local authorities in central and eastern Europe this year through local intermediary banks. That is three times last year's volume, and on more flexible terms.

The bank has a triple-A credit rating because it is owned and backed by the EU's solvent sovereign governments. So it borrows at cheap rates and lends the money on the same terms to clients who would otherwise have to pay far more to borrow. Firms may now use the cash as working capital, for research and development and to buy patents and not just to buy goods.

The EIB is also working to address the special problems of eastern Europe. From Warsaw to Kiev, floating currencies have sunk against the euro, punishing hard-currency borrowers, while governments are struggling to raise funds as capital flows from parent banks in western Europe to eastern subsidiaries dwindle.

With the European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC), Maystadt is looking to support banks in eastern Europe.

"For example one could imagine combining equity stakes from the EBRD with bigger credit lines provided by the EIB, using the specific instruments of each institution in a coordinated way to increase efficiency. If the EBRD comes in to reinforce a bank's capital, it means we can lend more to that bank," he said.

- Paul Taylor is a Reuters columnist. The opinions expressed are his own