It's possible that Private Public Partnerships (PPPs), a structure used in Europe and endorsed by the European Investment Bank (EIB), will begin to appear as collateral in European collateralized debt obligations down the line. Fitch Ratings envisioned this development in a recent market summary piece.

A wave of countries will join the European Union on May 5, though adopting the euro will take some careful maneuvering as candidate countries may have mounting deficits that do not comply with the policy laid under the Maastricht criteria.

Over the course of the next two years the countries - having become members of the European Monetary Union - must participate in the European Exchange Rate Mechanism, and they are required to achieve a convergence of local and foreign currency ratings outlined under the Maastricht convergence criteria. "On one hand, potential balance-of-payments pressures will diminish, supporting foreign currency ratings," explained analysts at Standard & Poor's. However, economic structure and fiscal matters will become more important, potentially putting more stress on local currency ratings.

"As a result, the overall convergence process for EMU candidates will be characterized by both increases in foreign currency ratings and decreases in local currency ratings," the S&P analysts said.

The new member states - Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia - will have to implement methods that free up more money for development. This is no simple task considering that investments by established member states have fallen to 17.2% of GDP in 2002 from 18.3% of GDP in 2000, reported the EU. This faltering investment is being felt in the new member states, the EU said.

The European Union has given the go-ahead for the EIB's medium-term plan to boost growth and competitiveness. EIB is the policy bank for the EU.

The scheme - which aims to accelerate investment in infrastructure projects under the EU's Trans European Networks (TEN) initiative, with enhanced EIB support - has benefited accession countries since 2001. According to industry reports, once the 10 new member states become fully integrated under the EU, lending will be facilitated and should grow to at least 5.3 billion (US$6.3 billion) in 2006.

The new projects under the proposed acceleration scheme aim to improve transport, energy and communication links among the existing member states, as well as fully integrating the new member states. So far, the bank's initiative has identified 31 projects with 38 billion (US$45 billion) until 2010 for cross-border sections of the TEN transport network; 15 projects with v10 billion (US$12 billion) until 2010 in key TEN energy projects; and eight projects with v14 billion (US$16 billion) for high-speed and mobile communications networks and innovation.

Under the EIB's accelerated-growth plan, PPPs will be implemented as a method to raise some of this financing for EU member states. The PPPs are structures that allow the private sector to finance and manage capital projects over the longer term as opposed to having the government pay for projects up front. It's a scheme that has long been used in the U.K. under the country's Project Finance Initiative, and it is beginning to take hold on the continent. France, Portugal, Spain and Germany are introducing legislation to facilitate such a scheme.

The EIB is looking into using securitization as a method to free up funding for further project finance structures. At the moment, the EIB said that governments that have already used PPPs will be easier to approach, but, for the new member states, the challenge to find public and private partners to originate projects still remains an issue. The Maastricht criteria also limits the budget deficit to 3% of the GDP, which could constrain investment possibilities.

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