On Tuesday morning, the EU signed off on €750bn borrowing for its Next Generation EU project — the EU’s coronavirus recovery fund. The budget must still be ratified by member states’ national parliaments but, assuming that goes to plan, the EU will become, at a stroke, one of the largest issuers in the market.
And that comes on top of the €100bn it will raise by the end of 2021 to finance the Support to mitigate Unemployment Risks in an Emergency (SURE) programme, plus a few billion a year rolling over EFSM loans and providing macro-financial assistance.
Over the past seven years, only four borrowers have sold more euro paper than the EU plans to sell in the next seven: Italy, France, Spain and Germany. That means it will likely outsell the EFSF and ESM, KfW, EIB and many sovereigns.
Borrowing across the board has increased dramatically, so the €850bn the EU will sell is unlikely to be as much as the 9.5% it would represent of the last seven years of funding, but it will nevertheless account for a huge slice of euro public sector debt.
Assuming the EU maintains its triple-A ratings, which seems likely at this stage, it will become a competitor for the very top names in Europe’s debt markets. It stands to provide a uniquely liquid exposure to the health of the European economy — more diversified than the Bund and with a better credit quality than virtually anything else.
The effects are not yet being felt beyond a slight sell-off in OATs and Bunds and a slight rally in periphery credits on the prospect of the grants from the recovery fund itself. The full consequences will likely not be felt for months yet — not before the EU has a few bonds outstanding and something approaching a liquid curve, perhaps in the second quarter of 2021. Too early to begin holding shorts, but awfully soon by the standards of those planning their funding calendars.
When it is time, Europe’s borrowers will surely feel the pinch. For the top end, they must prepare for wider spreads as investors, flooded with new supply, push back on pricing. With the ECB snapping up vast amounts of paper, investors have been forced to scramble for assets. But how long will the mighty Pandemic Emergency Purchase Programme last? When it ends, a huge buyer disappears and another 50% of the latest huge seller’s bonds will be up for grabs.
For smaller European borrowers, or those further down the ratings scale, to avoid getting lost in the rush they must get out in front of investors — presumably by video call — and ensure their stories are fresh in the minds of their buyers.
There should still be enough cash to go around, but it will be harder than usual for smaller borrowers to ensure that enough of that money is paying attention to them.