A.M. Romani, Deputy Head of Funding, Nicola Mercusa, Capital Markets Officer Rome, November 2003 Structure of Presentation

I. EIB: Instrument of

II. EIB: Funding Needs and Policy

III. EIB and the Euro

IV. EIB: Innovation in ACC and Structured Markets

2 EIB Instrument of European Integration

3 Mission

ECONOMIC World Europe POLICY GOALS* Macroeconomic equilibrium IMF European (STABILITY) Monetary Union Allocation of resources WTO European Internal (EFFICIENCY) Market

Balance of wealth distribution World Bank EIB (EQUITY)

• Taxonomy originally proposed by Prof. Musgrave for budgetary policy (see : R.A. Musgrave/ P.B. Musgrave, Public Finance in Theory and Practice, 1984, Chapter 1)

4 => Close Association with EU Goals

• Created by the establishing the European Community (1958) as modified by the Treaty of Maastricht on (1992) (Art. 9)

• Art. 158/159 of the Treaty: – « … the Community shall aim at reducing disparities between the levels of development of the various regions… » and – « … shall also support the achievements of these objectives by the action it takes through the structural funds…, the European Investment Bank and the other existing financial instruments »

• Statute drawn up as a Protocol anexed to the Treaty (Art. 311)

5 => Joint European Governance

• Board of Governors, composed of Ministers designated by the Member States

• Board of Directors, appointed by the Board of Governors

• Management Committee, appointed by the Board of Governors on a proposal from the Board of Directors

6 => Joint European Sovereign Ownership, today…

Federal Republic of 17.8% 2.5% Kingdom of AAA/Aaa/AAA AAA/Aaa/AA+

French Republic 17.8% Republic of AAA/Aaa/AAA 2.4% AAA/Aaa/AAA

Italian Republic 17.8% AA/Aa2/AA 1.4% Republic of AAA/Aaa/AAA 17.8% AAA/Aaa/AAA 1.3% Hellenic Republic Kingdom of A/A1/A 6.5% AA+/Aaa/AA+ 0.9% Portuguese Republic Kingdom of AA/Aa2/AA AA+/Aa1/AA 4.9%

Kingdom of the 0.6% 4.9% AAA/Aaa/AAA AAA/Aaa/AAA

0.1% Grand Duchy of Kingdom of 3.3% AA+/Aaa/AA+ AAA/Aaa/AAA

S&P/Moody’s/Fitch

7 …and after Enlargement

Current situation G e rm a ny AAA 16 .28% A Fra nce AAA 16 .28% AA Ita ly AA 16.28% 1.3% 23.6% Un ite d Ki ng do m AAA 16.28% Sp ain AAA 9.77% Belg iu m AA 4.51% Th e N e th e rla n ds AAA 4.51% S w e de n AAA 2.99% De n m a rk AAA 2.28% Au stria AAA 2.24% Po la nd A 2.22% AAA Fi nl a nd AAA 1.29% 75.1% G re e ce A 1.22% P ortuga l AA 0.79% After enlargement Cze ch R e pu bl ic A 0.74% Baa1 Hunga ry A 0.69% A Ire la nd AAA 0.57% AA 5.4% 0.2% Slo vakia A 0.25% 21.8% S love nia AA 0.23% Lithua ni a Ba a 1 0.15% Lu x e m bou rg AAA 0.11% A 0.11% La tvia A 0.10% A 0.07% M a lta A 0.05% AAA

72.6% (*) In case of split rating, the best 8 rating has been taken => « The way to buy Europe » : EIB’s Recognition in the International Capital Markets

Consolidated European Sovereign Issuer EIB Funding needs and Policy

10 Statutory Signposts

• Art. 22: « The Bank shall borrow on the international capital markets the funds necessary for the performance of its tasks» • Art. 18: « The aggregate amount outstanding at any time of and guarantees granted by the Bank shall not exceed 250% of its subscribed capital » • Art. 19: « Interest rates on loans to be granted by the Bank and commission on guarantees shall be adjusted to conditions prevailing on the and shall be calculated in such a way that the income therefrom shall enable the Bank to meet its obligations…»

11 => Lending, Refinancing and Capital move in Tandem

EUR 375 bn Lending ceiling

Outstanding lending Lending ceiling up to 250 % of subscribed capital Subscribed capital

EUR 234 bn Outstanding lending

EUR 150 bn Subscribed capital

12 => Large Debt Flows

38

Supranational issuance in 2002

13

7

4 2 2

EIB IBRD IADB ADB IFC EBRD Estimate for 2003: 42 Mrd

In EUR billion Source: Bondware and EIB for its own data 13 => “Yin and Yang” Funding Policy

CUSTOMIZED FUNDING (LOWER COST)

BENCHMARK FUNDING (LARGER VOLUME) =>Interest and Exchange Rate Hedging

• All funding transactions of the EIB are hedged via swaps and deferred rate setting agreements against exposure to both absolute and relative movements of interest rates as well as against exchange rate risks

15 => Currency diversification: 14 currencies in 2002

NOK DKK GBP PLN

CZK JPY EUR HUF HKD USD TWD

AUD

ZAR

NZD

16 EIB and the Euro

17 Euro is EIB’s Core Currency

Total Outstanding Debt : EUR 185 bn Inc. CP, before swaps as of Dec. 31st 2002 Other 8% GBP EUR 15 bn EUR 26% EUR 48 bn EUR 77 bn 42% Annual issuance (before swaps as of Aug. 31st 2003) EUR 45 bn

EUR GBP USD Other Estimate

45 USD 24% 40 35 2003 Issuance (before swaps as of Aug. 31st 2003) 30 25 Other 10% 20 GBP 15 15% EUR 45% 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

USD 30% Euro: Market Development and Innovation Mix

Innovation Type TECHNOLOGY Eur-market PRODUCT POLICY development INFANCY (Early 70s to late 80s) « TEEN »- AGE (’90 – ’95) EARLY YOUTH (’96 – ’98) « SHADOW- LINE » (’99 – 2001) LATE YOUTH (2002 - 2006) Product

3.4.5.EUR 5bnEARN

1. HUF-Eurotributary 1. EUR 5 bn EARN

1. EUR 3 bn EARN

1. EUR 2 bn EARN 1. EIB EUR Exchange Offer 1. EUR issue 1. EUR global 1. issue with guaranteed conversion ECU/EUR 1:1 1. eurotributary issue 1. EIB 1. EIB ECU CP Continuity of ECU issue issuance 1. EURCO 1. EIB issue ECU jumbo 1. EIB ECU short term Notes

3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 Policy

3.4.5.EUR 5bnEARN

1. HUF-Eurotributary 2.EARNs Programme (« market makers ») 1.EUR 5bnEARN 1. EUR 3 bn 1.EARNs Programme (« primary dealers ») EARN EIB EUR Exchange Offer 1. EUR 2 bn EARN 1.EUR Global 1. EUR issue Market making 1. issue with guaranteed conversion ECU/EUR 1:1 agreements with banks 1. eurotributary issue

1. EIB ECU 1. EIB ECU CP 1. EURCO issue 1. EIB ECU issue jumbo 1. EIB ECU short term Notes

3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 Technology

3.4.5.EUR 5bnEARN

1. HUF-Eurotributary EARNs Programme (« market makers ») All EARNs on Bondvision Parallel quotation of EARNs on EuroMTS/MTS 1.EUR All EARNs on MTS/EuroMTS 5bnEARN 1. EUR 3 bn 1.Exchange offer via Internet EARN 1. EARNs Programme (« primary dealers ») 1. EUR 2 bn EARN 1.Trading onMTS 1. EIB EUR Exchange offer 1.EUR Global 1. EUR issue Market making 1. issue with guaranteed conversion ECU/EUR 1:1 agreements with banks 1. eurotributary issue

1. EIB ECU 1. EIB ECU CP 1. EURCO issue 1. EIB ECU issue 1. EIB ECU short jumbo term Notes

3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 EIB and the Euro:Innovation responds to Integration

Innovation PROGRESS BY PROGRESS BY PROGRESS BY Type POLICY TECHNICAL Eur-market PRODUCT ADVANCEMENT development FRAMEWORK -issues in basket currencies -framework agreements with - payment and clearing INFANCY -in short and long end authorities in individual systems -in different countries countries for the establishment of European (Early 70s to late -in growing size 80s) common standards in: -with increasingly common -issuance procedures characteristics -tax treatment -increases to benchmark -listing - hedging instruments TEEN-AGE size -investment eligibility (’90 – ’95) -continuity of issuance EARLY - new « euro » products - market making agreements -« global » infrastructure with banks on individual -electronic trading YOUTH issues experiments (’96 – ’98) « SHADOW- -consolidate eurotributaries - cooperative framework -depositary arrangements -add liquidity via increases with banks (geographical -e-bookbuilding, B2B, B2C LINE » beyond EUR 5 bn threshold focus) (’99 – 2001) -new benchmarks -new EUR 5 bn benchmarks -cooperative framework with -crossborder links across LATE -longer maturities banks (performance focus) European platforms YOUTH -eurotributaries in ACC -extension of market making -electronic trading -« pension funds » products arrangements outside infrastructure for euro (2002 – 2006) Europe outside Europe -« Basle II » products Results: EIB EARN* Eurobenchmark Curve

€ EARN 3.625% 15 Oct 2013 € 5 bn € 60 billion outstanding € EARN 5.375% 15 Oct 2012 € 5 bn 11 EuroMTS-benchmarks € EARN 5.625% 15 Oct 2010 € 5 bn € EARN 4% 15 Apr 2009 € 5.5 bn € EARN 3.25% 15 Oct 2008 €5 bn € EARN 5% 15 Apr 2008 € 6.1 bn € EARN 5.75% 15 Feb 2007 € 2.6 bn € EARN 4% 15 Jan 2007 € 5 bn € EARN 4.875% 15 Apr 2006 € 5 bn € EARN 3.5% 15 Oct 2005 € 5 bn € EARN 3.875% 15 Apr 2005 € 5 bn € EARN 5.25% 15 Apr 2004 € 6.2 bn

*Euro Area Reference Notes As of 28 Nov. 2003 Looking forward: 4 Innovation Drivers

ACCESSION PENSION REFORM INTEGRATION OF BASLE II T/C/S PLATFORMS 0% risk weighting •Benchmarks •Long end •Links across •Broaden offer •2ary market •UK-euro « link » domestic platforms (e.g. parallel bonds) spectrum •Legal framework •«Around the •Pension fund products globe» market •Eurotributaries (e.g. inflation-linked)

Intensify marketing with

2.Giovannini report on …UK joins EMU?.. C&S ACCESSION

Dec June Apr Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul-

01 01 01 01 02 02 02 02 03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07

UCITS IAS UCITS in FRS 17 Basle II Directive Regulation force in force EIB Structured and ACC Markets

26 Euro: Market Structure Today

• Increasing concentration of financial intermediaries • Emergence of two market segments, dominated by and large by the same top intermediaries:  benchmarks (transparency, market making)  non-benchmarks (segmentation, delivery) • Market-driven objectives: -cooperate with top market makers (adequate new issue size, bookbuilding, fair pricing) Close coordination of benchmark -reward performance in and non-benchmark funding secondary trading and/or delivery of non- benchmark transactions Results: Strong Growth in Structured Issuance

2000 2001 2002 2003 (31.10) No. of transactions: 149 148 219 291

- non-structured 126 94 90 75

- structured 23 54 129 216 Volume (EUR bn equiv.): 29.00 32.31 38.01 40.91 - non-structured 27.16 31.03 34.61 32.10 - structured 1.85 1.27 3.40 8.80 % Total funding: - non-structured 94% 96% 91% 78% - structured 6% 4% 9% 22% No. currencies: 11 13 14 15

28 Strategy joins Flexibility

• Within its global borrowing strategy, the EIB is responsive to investors’ needs by issuing a wide variety of non- benchmark products

• The EIB is fully oriented towards extending the product range available to investors through extreme flexibility for tailor-made products in terms of structures, maturity, size, listing, etc

• EIB’s efforts have recently been recognized by the financial community in the form of Euroweek’s award for the Most Innovative and Receptive borrower EIB’s Experience in 2003

• Out of the EUR 41 billion equivalent issued so far this year 22% was in the form of structured transations, for a total amount of over EUR 9 billion equivalent (almost tripled wrt 2002)

• Products were issued under the legal framework of EIB’s MTN programmes

• 8 different currencies (EUR, GBP, CZK, JPY, PLN, SKK, TWD, USD)

• In particular, EUR-denominated structured transactions reached the volume of about EUR 3.5 billion, almost tripled with respect to the previous year Instruments issued in Euro in 2003

Amoun t Tipology Percentage (EUR) 1,495,000,000 Step-up coupon Notes - Callable 43.21% 98 5,000,000 Fixed / E uroz one In flation-linked coupo 28.47% 50 0,000,000 Fixed R ate - Calla ble (nc2) 14.45% 24 0,000,000 Sticky Floating R ate Notes 6.94% 10 0,000,000 Floored S ticky Floater 2.89% 70,000,000 Fixed rate/steeper lin ked - C alla ble (3) 2.02% 50,000,000 Fixed rate / C urrency linked coupons 1.45% 20,000,000 Sticky FRN/Fixed - C allable (3) 0.58%

Total amoun t issued EUR 3.5 billion THETHE EIBEIB ININ THETHE INFLATION-LINKEDINFLATION-LINKED MARKETMARKET

Sources of demand: • Particular interest from investors with IL liabilities, e.g. insurers, pension funds • Also interest from market participants taking a view on expected inflation • Pockets of retail interest

EIB approach: • Flexible and responsive • Established reputation in £ IL market • Pioneered structured IL issuance in € • EIB hedges inflation risk

32 EIBEIB InflationInflation LinkedLinked issuanceissuance -- ooverviewverview

EUR GBP Entered in the market in Dec. 02 Entered in the market in Nov. 00

From 2007 to 2015 From 2007 to 2038 EUR 1,085 million GBP 806 million

8 bonds with volumes from EUR 50 8 bonds with volumes from GBP 30 to 260 million to 250 million All structures combining fixed "Plain vanilla" and also structured followed by inflation linked coupon issues European harmonized inflation RPI, LPI index (HICP ex tobacco) So far no back-to-back Almost GBP 350 million raised for transactions back-to-back

33 EIBEIB ISSUANCEISSUANCE ININ ININFLATION-FLATION-LLINKEDINKED PRODUCTSPRODUCTS GBPGBP Logic of Inflation Linked (IL) bond issuance for back-to-back loans: • Projects where income is explicitly or implicitly linked to an inflation rate and will thus benefit from loans linked to the same inflation rate. Relevant sectors typically include utilities, healthcare, transport. • Extensively used in the growing market for public private partnerships (PPPs) within the European Union EIB project examples: • Dudley Hospitals, UK (May 2001): first EIB RPI index linked financing with a specific back-to-back bond issue. • Road safety in Yorkshire, UK. (February 2003) • Blackburn Hospital, UK (July 2003): latest project financed with a back-to-back IL bond

34 EIBEIB ISSUANCEISSUANCE ININ ININFLATION-FLATION-LLINKEDINKED PRODUCTSPRODUCTS EUREUR

EUROZONE INFLATION-LINKED STRUCTURED TRANSACTIONS

Amount Launch Settlement Maturity Dur. Tipology

10 0,000,000 04-Dec-02 19-Dec-02 19-Dec-07 5. 0 Fixed / Inflation-linked coupo 13 0,000,000 09-Jan-03 24-Jan-03 24-Jan-10 7 .0 Fixed / Eurozone Inflation-linked coupo 75,000,000 28-Aug-03 01-Oct-03 01-Oct-10 7 .0 Fixed / Eurozone Inflation-linked coupo 15 0,000,000 23-Jan-03 24-Feb-03 24-Feb-11 8 .0 Fixed / Eurozone Inflation-linked coupo 17 0,000,000 18-Feb-03 11-Mar-03 11-Mar-11 8 .0 Fixed / Eurozone Inflation-linked coupo 10 0,000,000 18-Feb-03 20-Mar-03 20-Sep-11 8 .5 Fixed / Eurozone Inflation-linked coupo 26 0,000,000 29-Jan-03 28-Feb-03 28-Feb-13 10.0 Fixed / Eurozone Inflation-linked coupo 10 0,000,000 03-Mar-03 27-Mar-03 27-Mar-15 12.0 Fixed / Eurozone Inflation-linked coupo

35 TheThe futurefuture inin thethe inflationinflation linkedlinked marmarkketet

• Continue to support development of the market

• Potential back-to-back transactions

• Potential in € boosted by anticipated changes in regulations in European markets (evolution of pension systems, UCITS directive, IAS, FRS17, etc)

• Constraint: deepening of swap markets to support hedging of larger volumes

36 THE EIB IN ACC CAPITAL MARKETS

EIB’s mission: • Raise funds in domestic and international markets in support of EIB’s role as largest multilateral lender in the • Leverage AAA credit standing and integrated funding strategy to achieve lowest borrowing cost and correspondingly attractive lending terms • Respond to growing preference for funds in local currency Therefore support development of local currency capital markets, issuing as a complement to sovereigns

37 BORROWING STRATEGY IN ACC

1. Build issues to liquid size, establish yield curve where possible - Long term development of benchmark programme - EMU in mind – EIB issued first euro-fungible notes (HUF) 2. Respond to specific needs of investors, including longer maturities and structured issues 3. Create and leverage a sound domestic issuance framework: - Domestic Debt Issuance Programmes (HUF, PLN, CZK): set the scene for regular issuance in local currency

38 ACC BORROWING: Results (I)

• Active in ACC capital markets since 1996 • International issuance in CZK, HUF, PLN, SKK • Domestic Debt Issuance Programmes: CZK 30 bn* (1999), HUF 50 bn (1997) and PLN 3 bn (2001)

• First Euro-tributary bond issued in HUF (Step-down 15.10.2012) • Growing size and sophistication of local base

*Increase planned in near future

39 ACC BORROWING: Results (II)

Largest non-government issuer in Acceding Countries: €535 million in 2002, strong growth in 2003 to over €1.2bn (ytd)

€ m equivalent

1400 1200 1000 SKK 800 PLN 600 HUF 400 CZK 200 0 1999 2000 2001 2002 2003

40 TREASURY POOLS IN LOCAL CURRENCY

• EIB maintains treasury pools of floating rate funds in four ACC currencies: CZK, HUF, PLN, SKK

• This policy improves flexibility and cost effectiveness of borrowing and on-lending in local currency - Allows creation of stock of funds - Facilitates smaller loans and wider range of structures

• ACC pools are: - In floating rate format - On-lent at average funding cost (plus intermediation margin)

41 The Final Picture

EIB Issuance

EUR 45-47 bn equivalent needed in 2004

European Financial Integration EIB

Consolidated European Sovereign Issuer

43