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Capital markets that are fit for the future

Johannes Hahn, European Commission

Looking back at 2021 means looking into a new chapter for the European Union: the renewal of the European promise. The EU has used the past year to gain sovereignty by acting together. Facing an unprecedented pandemic challenge, we managed to find an adequate answer: a record stimulus package of more than €2tr — boosting the long-term budget with the firepower of NextGenerationEU.

This allows us not only to react to the current challenges but also to anticipate the crucial transformations. Therefore, climate action and digitalisation are at the heart of our plans. We will invest more than half of the long-term budget and NextGenerationEU in future-oriented priorities.

A win-win for investors and the EU

With NextGenerationEU, the EU has broken new ground: it allows the Commission to issue bonds on a large scale — backed by the EU budget — to help the EU to emerge stronger from this coronavirus challenge. This is a game-changer on the European political landscape and it will make the EU one of the largest issuers in euros – amounting to roughly 5% of EU GDP.

Johannes Hahn, European Commission

The successful start of NextGenerationEU speaks for itself: the first issuances have been oversubscribed, and in less than 12 months we have raised some €170bn of long-term funding — with more than €100bn for our back-to-back programmes, including SURE, and €71bn for our flagship NextGenerationEU recovery instrument. We also initiated the EU-Bill programme, offering highly liquid paper — which is very useful for banks and institutions seeking a secure, short-term euro-denominated placement.

A funding programme of this scale — with up to €807bn in current prices to be raised between mid-2021 and 2026 — requires a state-of-the-art funding toolkit. The Commission has put in place a fully-fledged machinery to implement a diversified funding strategy, combining high flexibility with predictability. This includes the creation of a primary dealer network and a tailor-made auction platform for EU-Bond and EU-Bill auctions.

With NextGenerationEU, the EU’s true value will further increase, as we lay the foundations for sustained growth in the future. NextGenerationEU will accelerate digitalisation and the climate transition on a continental scale. At least 37% of the national recovery and resilience plans will go to green investments, and 20% to the digital transition.

Capital markets’ role in climate transition

NextGenerationEU reflects our political goals also in the funding strategy, as we will issue 30% of NGEU as green bonds. Our first green bond issuance in October was a success on many levels: The fact that it was 11 times oversubscribed showed the high demand for such an asset. And with €12bn raised, it was also the largest ever green bond issuance worldwide. As the EU is on track to become the world’s largest green bond issuer, credibility is crucial. Our reference is the current well established standards of the market — the International Capital Market Association green bond principles.

Our NextGenerationEU green bonds allow investors to diversify their portfolios and thereby potentially accelerate a virtuous circle of sustainable investments. At the same time, it empowers Europe to strengthen its profile: it will help us to develop new technologies, create the jobs of tomorrow and ensure our role as first movers setting global standards. The boost that the green bond market should help other issuers in following this path and confirm the positive role that capital markets can play in meeting the climate transition challenge.

Enriching the capital markets

NextGenerationEU bonds demonstrate that the EU is not just using capital markets, but also developing them — as a look at the broader picture shows. The large-scale NextGenerationEU issuance ensures high liquidity at all points of the maturity curve, thereby fulfilling a key function for a new benchmark asset. This helps EU and global investors to build euro-denominated positions and price risk across the euro-zone.

NextGenerationEU will give more options for portfolio risk management and increase the attractiveness of euro-denominated assets, benefiting all investors and boosting the international role of the euro.

The availability of such a new, liquid, high quality asset also provides an alternative to domestic sovereign issuance for banks’ regulatory capital requirements. This reduces the sovereign-bank doom-loop and is thus strengthening the stability of the EU banking system.

Conclusion

NextGenerationEU is focusing — as its name promises — on the future. With this instrument, we are not only providing the required fiscal stimulus across EU member states to achieve a sustainable recovery, but we are — on a budgetary level — behaving as a good investor. We are strengthening the EU’s green and digital transition and are thus sowing the seeds today, so we can harvest growth, jobs and prosperity tomorrow.

That makes investing in our union an excellent investment: we are spending our money for long-term ambitions, while our repayment matches this long-term horizon. The underlying message is clear: our union is here to stay — and we will contribute to enrich your businesses as well.

Johannes Hahn, European commissioner for budget and administration

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