Juncker plan “too expensive” for SMEs due to country risk
Investment funding to Cypriot small and medium-sized enterprises and midcaps through the Investment Plan for Europe, known as the Juncker plan, is expensive due to the risk associated with Cyprus, which is exiting a three-year economic adjustment programme, experts have told an event organised by the Representation of the European Commission in Cyprus.
As Cyprus is rated three to four notches below investment grade, the European Investment Bank (EID), the bank of the EU, lends Cypriot banks in normal operations with low interest rates due to the state guarantees the Cypriot government provides offsetting the risk that otherwise would be assumed by the EIB, according to the Cyprus News Agency.
“That enables us to lend the banks with zero risk for us, whereas if we were to give a bank a guarantee under the European Fund for Strategic Investment (EFSI), take the Cypriot country risk, we would lend with 6% to 7%,” Flavia Palanza, EIB Director for Central and South East Europe said at the event.
The EIB with the Cypriot authorities have developed custom made investment schemes for Cypriot SMEs and midcaps that reached EUR 200 mln in 2015, from which EUR 100 have been allocated.
According to Nicos Yiambides, Senior Loan officer at EIB, under the scheme eligible companies must employ up to 3,000 employees and apply for loans up to EUR 25 mln. The interest rate ranges between 2.6% and 3.5%.
“With the current rating of the Cyprus economy and the banks I don’t think the interest rate would be less than 4% to 4.5% to lend the banks (under EFSI),” Yiambides explained.
Noting that no EFSI investment funding has been observed in Cyprus, Palanza said “what matters is to increase investment and increase them well either with EFSI or without EFSI.”
Kyriakos Kakouris, Senior Economic Officer at the Ministry of Finance, said that Cyprus did not manage so far to attract EFSI funding for projects.
“We look at the opportunities and potential EFSI has for Cyprus,” he said, adding that as Cyprus is exiting its three-year programme and economic growth restored “EFSI could have a catalytic role in its riskbearing role may be instrumental in boosting investment and leading our economy into further progress in the coming years.”
George Markopouliotis, head of the European Commission Representation in Cyprus, said the Juncker plan comes to fill a gap, as Europe faces a 15% of EUR 430 bln reduction in investment from the peak of 2007.
“This is a real problem. In the short term, weak investment slows economic recovery, in the longer term, the lack of investment hurts growth and competitiveness. Weak investment in the euro area has a considerable impact on the capital stock which in turn holds back Europe’s growth potential, productivity, employment levels and job creation,” he stressed.
Palanza explained that following the financial crisis of 2008, although there is an abundance of liquidity, investment have declined due to a more risk-averse policy followed by the banks but from entrepreneurs themselves who do want to assume risk in a new venture.
The Juncker plan comes to cover this void by providing the EIB with guarantees from the EU budget, enabling the EIB to fund riskier strategic investment that would otherwise would not do so given its risk profile, as EIB secures liquidity from the markets.