This article is part of our special report Recovery fund: the engine behind the European transformation.
The European Union is set to become the continent’s largest supranational bond issuer within the next five years as a result of its SURE and NextGeneration programmes, aimed at helping the bloc’s economies recover from the damage caused by the COVID–19 pandemic.
With a total value of up to 5.5% of EU GDP, the €800 billion NextGeneration and €100 billion SURE programmes are likely to shake up the bond market. Last year, European social, sustainable, and green bond issuance already hit their highest ever volumes, a trend which is set to be accelerated by the new bond issuance.
Between mid-2021 and 2026, the total ‘NextGenerationEU’ bond issuance will amount to €800 billion, including 30%, equivalent to around €250bn, as green bonds. In 2021 alone, up to €65bn will be brought to the market from July onwards, after the EU has finalised its European green bond standards.
Deutsche Bank’s Natacha Hilger has estimated that over the remainder of 2021, under the NGEU programme, the EU is likely to issue €10 billion in new bonds every two weeks, putting it in the same rank as Spain and France, the eurozone’s second and fourth-largest economies, respectively.
Analysts have also noted that the size of the EU bond issuance could impact on the bond programmes of EU treasuries and improve sovereign credit ratings.
That, says EU Budget Commissioner Johannes Hahn, will also help bolster the international position of the euro.
Hahn recently said that the widespread investor interest in the EU bonds was because investors “consider the euro and the European Union as a safe asset, as a safe haven”, adding that this will result in “a very strong economic but also political impact.”
Nordic banking group Nordea has argued that a genuine EU-level safe asset has been needed for a long time, with investors hitherto seeing German Bunds as the main safe asset in the bloc. Nordea has also argued that “a true safe asset would also help in improving the functioning of the European financial markets”.
Last October, the European Commission issued a two-tranche €17 billion inaugural social bond under the SURE instrument to help protect jobs and keep people in work – a €10 billion bond and €7 billion bond, due for repayment in October 2030 and 2040 respectively.
The EU executive reported that the bonds, which form part of a programme worth up to €100 billion in social bonds, were more than 13 times oversubscribed.
Commentators have also pointed out that since the bonds are jointly issued, and will be financed either by member states or via new EU taxes, they represent a major step in EU integration and towards a genuine transfer union between rich and poor states.
However, despite the political and economic benefits of the programme, and the indications that there will be major interest from the market as a whole, there are several storm clouds on the horizon.
The questions of how exactly the EU borrowing programme will be financed remains unclear, although member states would have to make increased direct contributions to the EU budget in the event that new EU levies cannot be agreed upon.
Meanwhile, a group of eight investors known as ‘Recover Portugal’, which has an unresolved €2 billion case related to its investment in bonds of the former Portuguese bank Banco Espírito Santo (BES), say they will boycott the EU funds unless the Commission takes action to ensure that their case, and others similar to it, is resolved.
[Edited by Zoran Radosavljevic]