aWhen the European Union’s budget commissioner, Johannes Hahn, stepped up in front of the cameras and microphones in the press room of the European Union Commission on Wednesday two weeks ago, he also had a message to the big banks and other institutional investors: “The European Union Commission is ready to do business. The authority will add up to 800 billion euros in The coming months and years debt In the markets to finance the European Union’s recovery plan in the Corona crisis.
“This is a game changer,” Han said, looking at the total debt issues – and that changes everything. For the first time, the European Union Commission will take on such huge sums of debt. It is an unfamiliar role of the authority and Han.
After all, the EU Commission has so far distributed mainly the money it received from the 27 member states. So far, only a small portion of the EU budget has come from other sources. Now Han has to attract investor money himself.
However, that should be easy. Banks, mutual funds and other investors are awaiting the next billion euros in debt. For a long time, professional investors have been calling for so-called European safe assets – a safe asset class from Europe with an excellent credit rating.
Investors like insurance companies rely on such practically safe investments as federal bonds in order to secure their portfolios and payment promises to their clients.
Guntram Wolff, director of the Bruegel Research Center in Brussels, predicts that „investors will be scrambling to get the commission bonds”. “In the European Union and around the world, there is a shortage of safe paperwork for institutional investors to invest in. So the banks have been clamoring for a long time. Bonds At the European Union level. „
Limited supply of better creditworthy government bonds
In fact, the supply of first-rate government bonds in the euro area has decreased significantly over the past fifteen years. Ago The Euro Crisis The credit rating agencies have lowered the credit ratings of Italy, Spain, Greece and other issuers.
This means that there is a large imbalance around the world: Americans provide a large number of these very safe investments, while Europe provides relatively few, due to the many cuts in the Eurozone. In addition to some euro countries such as Germany, Norway, Great Britain, Japan and Australia for example, they also issue bonds with high credit ratings.
It has already become clear in recent months that the committee will have an easy time issuing its bonds. The Commission has already issued bonds for definitely short-term European labor aid, which were launched during the Corona crisis, in order to finance the program, which totaled 100 billion euros.
It transfers money to member states so that national governments can use it to fund short-time work programs. Sure bonds have been physically snatched from the hands of the European Union Commission by institutional investors. It was a test run – and it was a huge hit on top of that.
Part of the reason for the success was that the bonds served a social purpose. Professional investors, especially those investing in the public sector, are under increasing pressure to invest a large portion of their money in a sustainable way. However, at present the demand for such sustainable systems that meet social norms and serve environmental protection is much greater than supply.
Hence, the spending bonds on climate protection or social measures are selling very well. Han and his new fundraising unit staff are just in time for the purpose. „30 percent of our reconstruction plan should be funded through green bonds,” Charles Michel, president of the European Council, said at US President Joe Biden’s climate summit last week. Hundreds of billions of green debt that markets must accept with gratitude.
The European Union wants to set standards for green bonds
The issues must strengthen Europe’s position in sustainable investments. Currently, more green bonds are issued in euros than any other currency. The European Union already has the most advanced rules for sustainable investment in the world and aims to create a standard for green bonds in the coming months. It could become a rule-planner in the rest of the world and bring a large chunk of the green plant business to Europe – at least that’s the hope for Brussels.
The prospects for EU bonds are so good and the success of the confirmed IPO has been so great that some national finance ministries are already concerned about up to 800 billion euros that the EU Commission wants in the markets in the coming years.
After all, in terms of creditworthiness, EU bonds play in the same league as federal bonds. „Some countries seem to be concerned that new EU bonds could ensure their own paperwork is less in demand,” says Wolf, director of Bruegel. „In fact, it would be unfavorable for the Commission to place so many papers simultaneously if Germany, France and Italy were to come onto the market in large issues on the same day.”
The committee takes these concerns very seriously. „We depend on complete transparency,” Budget Commissioner Hahn said when asked about these concerns. We will publish our financing plans every six months to investors and affected people. We will coordinate with other issuers so that emissions do not interfere. „
In the coming years, new EU debt is likely to play a major role in the financial markets; But in all likelihood, not in the long run. They are unlikely to counterweight dollar bonds – at least as long as the Reconstruction Fund is a one-off project, as Chancellor Angela Merkel (CDU) has promised.
„Commission bonds will only play a role in the next three years, because during this time the commission is putting in very large volumes compared to member states’ borrowing,” says economist Wolf.
It is believed that the Commission will eventually borrow about 500 billion because LoansThat the reconstruction fund, which is worth about 750 billion euros, can be earmarked. It should not be used by all member states.
In comparison to the total amount of public debt in Europe, the impact of the Committee papers is very limited. A look at the debt owed by the largest of the euro countries shows that: Italy alone has bonds of 2000 billion euros, and France and Germany have similar amounts.
However, if the EU-level debt becomes permanent, as is already required in some capitals, the EU Commission will likely become a major player in the European financial market.
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