The debate on the creation of a new EU debt fund, in imitation of the SURE program and the Next Generation, opens the way of a secret signature in the European club and also has the approval of the ECB, which sees in this type of instruments the opportunity to gradually build a fully community debt asset, which is as similar as possible in credit quality to the great benchmark bond in the region, the German bund, according to the central bank in a recent study.
The EU has already taken a giant leap in its financial integration as a result of the pandemic, when it launched the SURE program to finance unemployment benefits, and later the Next Generation program, endowed with more than 800,000 million euros that will be disbursed until 2026 and that the European Commission began to finance, for the first time from the community budget, in an initial issue in June 2021.
The war in Ukraine has posed a new and profound political and economic challenge to the EU with implications in the medium term, since it has accelerated a transition towards clean energy that will require multimillion-dollar investments for which financing must be sought, in addition to a burdensome initial bill for homes and businesses with the rise in electricity and food prices. And it is because of this growing need for investment and public resources that the idea of testing a kind of replica of the Next Generation is taking hold, this time linked to the impact of the war in Ukraine and the energy transition.
“It is likely that at some point the EU will give the green light to a new financing mechanism, such as SURE and Next Generation, this time to alleviate the effects of the war in Ukraine. But it is something that, given the way Europe works, should take some time to materialize,” says Rubén Segura-Cayuela, Bank of America’s chief economist for Europe.
Brussels needs financing for the war in Ukraine and the energy transition
The President of the European Commission, Ursula von der Leyen, pointed out yesterday at the Davos Forum as an action for the medium term the creation of a European “sovereignty fund” that provides a “structural solution” to promote research, innovation and key industrial projects. The German Chancellor Olaf Scholz is another of the supporters of a new common financial instrument, as recently published by Bloomberg, with which he will also face the competition that the subsidies for clean energies that the United States has approved will entail –an injection by nearly of 400,000 million dollars within the law for the reduction of inflation–.
The strategy for not missing the boat on industrial and technological transformation and its financing will be the subject of debate at the EU leaders’ summit to be held at the beginning of February. The creation of a new EU debt fund, which has already begun to be discussed in Brussels, is viewed favorably by the ECB in that it would mean another step towards a true common debt instrument that would also reinforce the profile as safe haven for bonds issued by the EU and would finally put them at the level of German debt, according to a central bank analysis.
Since their launch, these bonds have been seen by investors as of high credit quality, although not at the level of German debt. The market demands a small premium from them compared to the bund, although in any case less than what it demands from the rest of the sovereign bonds in the euro zone. Their rating does not reach risk-free asset status either: Moody’s does give them the highest rating (Aaa), but S&P leaves them one level below, at AA.
finite duration
For the ECB, according to an analysis published this week, the prospect of EU bonds becoming a true safe asset is hampered by the fact that both the SURE and Next Generation programs are posed as emergency responses to the pandemic. . And unlike German or US debt, for which the investor sees no end point, the bonds linked to those programs have a cut-off date of 2058.
“This finite maturity may discourage investors from establishing a long-term investment strategy in which EU bonds are considered a permanent part of their portfolios,” says the study prepared by ECB experts. Such an obstacle “could be mitigated by an additional EU budget-backed bond program to cushion the economic impact of the war in Ukraine, as was being discussed in the EU,” the report added.
For the first semester, the European Commission already plans to issue 80,000 million euros in bonds, of which 70,000 million correspond to the financing of the Next Generation and another 10,000 million to financial assistance for Ukraine. There is currently a volume of bonds issued by the EU in circulation for 331,000 million, of which more than half correspond to the Next Generation.
