The impending arrival of the EU has already started to have an impact in the public sector bond market. The likes of the European Investment Bank and KfW had to pay high new issue premiums as they returned to the euro market after the summer break, in anticipation of much wider spreads required to accommodate the vast supply from the EU.
The EU is set to issue the first syndicated bond for its SURE fund in late September. The deal sizes are expected to be big and so could come in a multiple tranches within each syndication.
According to market participants, the EU could raise anywhere between €25bn and €40bn by the end of the year, with a view to issuing €100bn by end of 2021.
It is also expected to finance its €750bn recovery fund through bonds, which was approved in July but still needs to be ratified before coming into effect.
The European Commission’s funding team told GlobalCapital in July that it intended to use social bonds to finance its SURE borrowing with a framework aligned to ICMA’s social bond principles.
If the EU does proceed with this plan, it will make a lot of sense. The use of proceeds for the SURE fund are intrinsically social. They comprise loans to member states to address sudden increases in public expenditure for the preservation of employment.
There is also speculation that the EU could finance a chunk of the borrowing for its recovery fund with green bonds. This would show the EU’s commitment for a green recovery and with Germany hoping to establish a green euro cure, it will have also have a clear green pricing reference point in the years to come. The EU could even rival Germany with its own liquid green curve.
But above all that, given the amount that it plans to raise, the issuance of sustainability bonds by the EU will give a huge boost in the development of the market into the mainstream.
Sustainability wonks often say the growth of this market is a chicken and egg scenario. You need a big volume of themed bonds to encourage socially responsible investment strategies and once the strategies are in place, this will encourage issuers to do more socially responsible bonds.
The EU has been a leading voice on the regulation of sustainable finance with its Taxonomy and Green Bond Standard. Now it has the chance to be a leading issuer in this market, raising its money from where its mouth is.