Brussels faces mammoth job with collecting billions for corona recovery fund

October 6, 2021 by No Comments

Strong, safe, social and green. It is almost an advertising campaign, the way the European Commission presents itself this week in the capital markets. With a new organizational structure and with a brand new portfolio of debt securities – because soon the Commission will be responsible for borrowing hundreds of billions of euros needed for the corona recovery fund. This means that Brussels suddenly becomes a major player on the international capital market and now has to reorganize and professionalize itself at a rapid pace. This Wednesday, European Commissioner Johannes Hahn (Budget) presented his plans for this.

It is all the result of the special corona recovery fund that member states agreed last year and that should come into effect in the second half of this year. In preparation for this, EU countries are currently eagerly working on their plans for how to spend the billions – while Brussels is strictly on the lookout for it. In the meantime, the European Commission is already preparing everything to ensure that the money can be paid out in the second half of this year.

High demand for safe assets

Due to inflation, the amount to be borrowed will be even more than the 750 billion that was pasted on the recovery fund last year. Ultimately, the Commission wants to raise more than 800 billion, which amounts to about 150 billion per year until 2026. And so Brussels is now starting to attract investors. Interested parties can choose from a wide range of debt securities, a so-called diversified portfolio, from bonds with maturities between three and thirty years to short-term ‘i-billsof a maximum of one year. A significant part of the entire package (30 percent) is also issued as ‘green bonds’, making the EU the largest issuer of sustainable debt securities in the world, according to Hahn.

The EU has no doubts about its popularity. The demand for safe assets is high and the backstop that all member states give the new debt securities means the EU has a ‘triple-A-status‘, the highest credit rating. Last year also showed how popular the EU is. Bonds for the so-called SURE program that helps member states with short-time work benefits were many times oversubscribed. “A great dress rehearsal,” said an EU official.

Mammoth job for Commission

Nevertheless, the large-scale debt issuance represents a mammoth task for the Commission, which will organize it, in its own words, “in a manner comparable to that of large governments”. Through a network of dozens of certified banks, the debts will be issued through auctions and syndications. The money collected is deposited at a central account at the European Central Bank, for subsequent transfer. To prevent the Commission from forcing other EU governments out of the market, it will publish a financing plan every six months so that investors and governments can coordinate and plan. A new ‘risk officer‘ must monitor the financial risks of the debt issuance in Brussels.

Reinforcing the role of the euro

The result is not only a well-stocked recovery fund: Brussels expects the large-scale European debt issuance will also stimulate international interest in the euro as a safe investment. And thereby strengthen the international role of the euro as a reserve currency – a long-cherished wish of Europe. An “game changer capital markets,” Hahn said of the new recovery fund on Wednesday.

The ambitious plans this week did not hide the fact that a dark cloud still hangs over the recovery fund. Of the 27 member states, only 17 have officially ratified the recovery fund so far. The Commission can only start borrowing when all countries agree. There are concerns about Germany and Poland in particular. In the latter country, a coalition crisis over the fund is looming, and in Germany the Constitutional Court has recently put the Bundestag’s approval on hold. Hahn emphasized on Wednesday that he has every confidence that the bumps in Germany will also be taken quickly. But his acknowledgment that there is no ‘Plan B’ for another scenario will certainly not reassure southern European countries, which are anxiously awaiting the first payouts.