Monday

16th Sep 2019

Investigation

ECB in ‘bail-out’ of scandal-tainted VW

  • Construction of a VW plant in Bialezyce, Poland. The European Bank for Reconstruction and Development put a loan for the project on hold (Photo: Volkswagen Poznan)

The European Central Bank (ECB) has started supporting Volkswagen Group (VW) by buying corporate bonds as part of a programme aimed at boosting the eurozone's economy.

The move stands in stark contrast to the policy of two other European financial institutions, which have temporarily banned working with VW after it emerged that the German company cheated on emissions tests.

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  • The ECB is supporting VW by buying corporate bonds (Photo: ECB)

In effect, the ECB is sending the message that it is neutral about VW's behaviour, a company which New York attorney general Eric Schneiderman this week described as having a “culture that incentivises cheating and denies accountability”.

The value of the bonds is unknown, but on Monday (18 July) the bank, in charge of monetary policy in the eurozone, made public that five VW bonds are among those being purchased.

The bonds have maturity dates between 2017 and 2021, and were bought by the German central bank, the Bundesbank.

The ECB bond buying programme is carried out by six national central banks, including the German institution.

ECB spokesperson William Lelieveldt told EUobserver he could confirm VW bonds were among those being purchased, but said he could give not details about “operational decisions”.

He would also not confirm reports from the Financial Times and the Sunday Times from September 2015. The newspapers wrote at the time, shortly after the VW scandal was brought to light, that the ECB had suspended buying loans backed by VW assets.

It appears that the ECB looks only at the creditworthiness of the assets, and other technical details set out in the legal act that set out its mandate, but does not take into account recent corporate affairs.

'Bail out' of VW

A left-wing German MEP Fabio De Masi said that the German central bank “appears to try to 'bail out' VW via the backdoor”.

VW has already had to put aside €16 billion to deal with the fallout of the crisis, and this week said it reserved another €2.2 billion, as the New York attorney general said he would pursue "substantial penalties".

MEP De Masi, a member of the parliament's committee on monetary affairs, told EUobserver in an e-mail “the bond buying of VW bonds [is] critical regardless of the VW scandal”.

“Corporate bond purchases are subject to moral hazard and vested interests in general,” he said.

The German EU parliamentarian noted the scheme is part of a wider attempt to revive the market of securitisation.

Securitisation is a financial tool through which loans, mortgages or other contractual debts are bundled and sold as securities - electronic documents that give the buyers the right to collect the collateral on overdue payments.

The result is that the risk of those loans is sold off, freeing up money on the sellers’ balance sheets to keep lending.

The European securitisation market collapsed after sales of bad debts in the US helped to create the 2008 financial crisis.

“I see securitisation critical, as it incentivises banks to push bad loans to buyers and involves contagion risks,” said De Masi.

Bond-buying is 'sensible'

His centre-right colleague, Pablo Zalba, saw things differently, however.

The Spanish MEP is also a member of the economic and monetary affairs committee, and will be one of the co-authors of a report from the parliament's inquiry committee on the VW scandal.

Zalba called the bond buying programme “sensible” and said that “the ECB's independence should always be respected”.

“I have no doubt the ECB is fulfilling its mandate,” Zalba said.

The bonds themselves have the required credit ratings, and although their value had a nosedive in the period immediately after the scandal broke, most of them are back at the same level, or higher, as a year ago.

EIB loans 'on ice'

Meanwhile, the European Investment Bank (EIB) has taken a different approach.

The bank, which grants loans to projects that are in line with EU policy, has suspended all lending to Volkswagen Group. A spokesman confirmed to EUobserver this week that the ban is still in place, and referred to a recent newspaper interview with EIB president Werner Hoyer.

In June, Hoyer told the Neue Osnabruecker Zeitung that “all our activities with VW are on ice”.

The ban followed the suspicion that part of a €400 million EIB loan may have been used by VW to develop the engines that were equipped with the cheating software. The ban will be in place until the EU's anti-fraud agency Olaf has wrapped up an investigation.

“We have worked closely and constructively with VW for many years, that's why we are so disappointed by VW's actions,” said Hoyer. He noted that lending from the EIB may become more expensive for VW in the future.

The EIB has supported several VW projects over the years, including loans for the construction and upgrade of production plants in Slovakia (€200 million), Brazil (€91 million), Mexico (€70 million), and Argentina (€45 million).

The loan which may have been misused, was signed on 16 February 2009. An EIB press release said at the time that the loan should “support the development and market launch of greener and more fuel efficient drive train components for passenger cars and utility vehicles”.

It was part of a programme aimed at reducing emissions in Europe's transport sector.

Polish factory

A second investment bank also put a VW project on hold.

The European Bank for Reconstruction and Development (EBRD) was supposed to lend a Polish daughter company of VW up to €250 million, for the construction of a production plant in the Polish town Bialezyce.

However, the loan to Volkswagen Poznan has also been put on ice. It still is, a spokesman for EBRD told this website, but without giving additional details as to when the ban would be reconsidered.

The EBRD was founded in 1991 to stimulate development in former communist and Soviet countries. It is owned by the EU, the EIB, and 65 countries around the world.

A spokeswoman for Volkswagen Poznan did not say if the company is still expecting to receive the loan.

“Whether EBRD plans to loan money to us, please ask the EBRD Bank,” she said, without adding if Volkswagen Poznan still needed the money. The construction of the factory is almost complete.

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