EU-Bonds: safe asset status still a dream, but Ukraine could make it real
An open-ended programme could bring the EU closer to being eurozone's benchmark
The European Union’s bond programme inched closer this week to establishing itself as the safe asset for the eurozone. But bigger steps are needed to secure this status, above all a more open-ended borrowing plan.
Earlier this week, the supranational unified the borrowing it does for its NextGeneration EU and Macro-Financial Assistance programmes for the first time, creating a bumper ‘EU-Bonds’ funding brand that is set to raise €80bn in the first half of 2023.
Meanwhile, the European Central Bank gave the EU an early Christmas present on Tuesday when it deemed its bonds to be as safe an asset as debt issued by governments and central banks.
Futures on EU-Bonds are likely to appear for the first time next year.
These tweaks will cheer the hearts of those who believe EU-Bonds are destined to become the bedrock bonds of the eurozone, as Treasuries are in the dollar market.
But EU-Bonds still have a very long way to go before they can dethrone Bunds as the eurozone’s most trusted safe asset.
By 2026, the EU’s balance sheet is expected to have swelled to almost €1tr, when the NGEU, MFA and Support to mitigate Unemployment Risks in an Emergency (SURE) schemes are added up.
Although this seems vast, it is dwarfed even by debt-hating Germany's €1.7tr of obligations. And the Finanzagentur plans to increase its debt stock by a record sum next year.
Unlike Bund issuance, the EU’s bond programme is also supposed to be temporary. Member states will pay back their NGEU loans between 2028 and 2058, at which point the last bonds financing them will be repaid. The SURE programme is set to end six years earlier.
Of course, many doubt that the EU will ever stop borrowing. Once started, it is an almost impossible habit to break. Between now and 2058, it is highly likely more emergency needs will arise that the EU feels bound to raise money for.
Nevertheless, establishing an open-ended borrowing programme now remains politically impossible. The initial coronavirus recovery packages were passed reluctantly, as some member states objected to burden sharing. The present time-limited schemes are as far as they were willing to compromise.
And although there was talk of another scheme for defence and energy costs in response to the war in Ukraine earlier this year, it did not materialise. States structured and financed their own responses.
But there is one common borrowing need that could unite Europe: the reconstruction of Ukraine.
The European Commission granted Ukraine candidate status earlier this year, and it hopes to join in the coming years. The EU already plans to raise €10bn in the first half of 2023 to fund MFA disbursements to Ukraine.
If peace can be achieved, the costs will be vastly greater.
An EU, World Bank and Ukrainian estimate of the cost of rebuilding the country stands at just under €350bn.
The EU will inevitably have to shoulder a significant part of this. And, even if it is structured as loans, who would expect that to be repaid any time soon?
Ukraine is no more likely than any other country ever to pay off its national debt permanently, and it will be a long time before it can finance itself in open markets at rates comparable to what the EU is likely to charge.
Such a pressing need could help the EU reconcile itself to a permanent presence in the bond market, on a larger scale.
It would then need to tackle the remaining obstacle. The EU may be perceived as a safe credit risk. But for the foreseeable future, Germany will be seen as safer.