GlobalCapital: What guidance can you give the market at this stage about the European Union’s borrowing programme for 2026?
European Commission: Since 2021, when we started our diversified funding strategy, we have been very structured and transparent in our communication about our funding plans, publishing them on a semi-annual basis. In line with this practice, we will communicate later in December our funding plan for the first half of 2026.
Transparency and predictability are crucial elements of our communication strategy. The issuance programme for 2026 will build on the 2025 programme.
For 2026, these funds will be used to finance ongoing disbursements under the NextGenerationEU programme but also disbursements under the new Security Action For Europe (SAFE) instrument and other funding needs, such as support to Ukraine and other neighbouring countries under established programmes. Bond issuance will be complemented by an increased amount of short-term funding to cover all liquidity needs, as necessary.
GlobalCapital: The SAFE programme was new this year. What is its future and what does it mean for the longevity of the bloc’s expanded bond issuance needs?
EC: Member states have agreed on the SAFE instrument, with €150bn to be financed by EU borrowing to boost European defence capabilities. Disbursements will start in 2026, with pre-financing of 15%. The instrument will be available until December 31, 2030. That gives another five years of funding needs under this policy.
SAFE was built and fully subscribed in record time — in five months. Nineteen member states indicated their interest in loans under SAFE and the indicated amounts exceeded the maximum size of €150bn. The tentative allocations per member state were published in September.
SAFE is another example of joint financing becoming more common for the EU as a tool to support political objectives.
Since the launch of the NextGenerationEU programme in 2020, member states have agreed on around €250bn of additional joint financing to achieve political objectives.
All these funding needs will continue to be raised under the EU’s unified funding approach with the issuance of EU-Bonds and Bills. As a result, and notwithstanding any new programmes that may be agreed upon, the EU will remain a major issuer in the European capital markets for the foreseeable future.
The EU budget will continue to serve as the ultimate system of protection of our issuance, guaranteeing the programme’s liabilities, making EU-Bonds and Bills a liquid and safe asset investment opportunity in European capital markets in the long run.
GlobalCapital: Speaking of defence funding, how does the EU fit into the expanded need for it overall between government and supranational funding? And should the EU take on even more of this requirement through an even bigger SAFE programme?
EC: Similar to all other financial support programmes, the maximum size is fixed in the regulation of the SAFE policy — it’s €150bn.
The SAFE instrument is one of the three pillars of ReArm Europe Plan/Readiness 2030, designed to use all immediately available levers to mobilise funding for defence investment.
The second pillar is the activation of the national escape clause of the Stability and Growth Pact, which allows a 1.5% of GDP increase in defence budgets and creates nearly €650bn in fiscal space over four years at the member state level.
The third pillar is supporting the European Investment Bank Group in broadening its lending to defence and security projects and accelerating the Savings and Investment Union to mobilise private capital so that the European defence industry is not reliant on public investment alone.
This means that EU member states will remain in the driving seat for defence while benefitting from the added value that the Union offers.
The activation of the national escape clause will facilitate member states’ transition to higher defence spending at the national level, while ensuring debt sustainability at the same time, by capping the increase at 1.5% of GDP.
To date, 16 member states have submitted a request to the Commission to activate the national escape clause under the Stability and Growth Pact. The European Council has approved the activation of the 16 requests, based on the Commission’s recommendations.
GlobalCapital: The EU wants to be viewed as a sovereign-like issuer in the bond market. Eurex recently launched futures contracts in EU-Bonds, but holding back participation in that market are US rules forbidding their hedge funds from trading them. Will the EU be making representations to be considered a sovereign under US financial regulations, and will it be making further efforts next year to be included in sovereign bond indices?
EC: Well, first let me mention that being viewed as a sovereign issuer is not a goal in itself. Our main objective is to maximise the successful rollout of our issuance programme to the benefit of member states.
In addition, we aim to contribute to the development of the European capital markets.
EU-Bonds have become a liquid and safe asset over recent years. Our outstanding debt has grown from €50bn in 2020 to €700bn now, helping our member states to overcome the pandemic and to make Europe greener, more digital and more resilient.
We became the second largest triple-A rated issuer of public debt in European capital markets and this also supports the European capital markets:
Including EU-Bonds in benchmark indices for strategic asset allocation means making this liquid and safe asset accessible to a wider group of investors. It also improves the credit rating and credit quality of an investor’s benchmark. It makes the benchmark and the strategic asset allocation of investors more resilient without compromising returns.
Last year, the Intercontinental Exchange (ICE) decided to create a new index family by adding EU-Bonds to their existing European government bond indices. Comparing these two index families — with and without EU-Bonds — we see that the indices which include EU-Bonds have a higher credit quality, reflected in a higher rating, while returns are almost unchanged.
Historically, the EU has been regarded by the market as a supranational issuer. The institutional set-up of the EU is closer to a sovereign than a traditional supranational issuer.
We have a budget-based financial structure. We have the power to legislate, implement and enforce law.
The EU has a common currency for the eurozone: the euro; and an independent central bank: the ECB.
In terms of our funding structure, we have much more in common with a sovereign bond issuer than we do with a development bank.
Issuing across the curve regularly, including the long end of the curve, and bringing our bonds to sizes of around €20bn using auctions, supported by a primary dealer group — all of this aligns more to a sovereign set-up than a typical supranational set-up.
There has been significant development in the market infrastructure for EU-Bonds and secondary market liquidity. And already an increasing number of market participants treat our bonds like sovereign bonds.
More and more banks are trading us from their sovereign bond desk. And in 2023, the ECB reassigned EU-Bonds under haircut category I in their risk control framework for credit, the same category used for instruments issued by central governments.
This development has also been picked up by the market. We saw the launch of ICE index futures at the end of last year and, in September, Eurex launched traditional bond futures on EU-Bonds.
Well-designed futures contracts, accessible to a larger group of market participants, support the objective of further developing the EU bond market ecosystem.
We therefore appreciate efforts like those of Eurex to improve the accessibility of EU bond futures. Making them eligible to a wider group of investors is the responsibility of Eurex. It is not under the Commission’s control.
GlobalCapital: Does the EU anticipate shortening its average duration, which I think is about 15 years, in light of curves steepening and higher yields and, in particular, investors like Dutch pension funds moving out of the long end of the curve?
EC: While it’s correct that our issuance has a slightly longer average maturity, we have never issued with an average maturity of 15 years. In 2022-2024 the average maturity was around 13 years, and this year it will be around 12 years. We have flexibility in our funding strategy and within this flexibility, we adapt to market needs.
At the same time, we aim at providing liquidity through new issuance across the curve and creating a redemption profile that enables us to have a stable market presence in the long run by rolling over our funding.
EU funding is structured based on budgetary backing and investor demand, with the objective to have funding costs at the lowest possible rates, considering the interest rate risk, and, therefore, preserving the financial strength of the Union while accounting for the absorption capacity of the market.
We will react using our flexibility, and also considering the other objectives I just mentioned.
GlobalCapital: Market participants have commented that investors have rotated out of OATs since the French sovereign downgrade and into other issuers. Has the EU as an issuer been a beneficiary of that?
EC: The EU has seen a large increase in its investor base over the last five years, from around 500 investors at the end of 2019 to almost 2,000 now.
More and more investors from both within and outside Europe take advantage of this asset and appreciate that investing in EU-Bonds avoids exposure to single-country risk.
We have had extremely strong demand with some transactions almost 20 times oversubscribed, even in periods of high uncertainty and market volatility within a single country.
Investors have perceived EU-Bonds and the euro as an anchor of safety and stability. This is something we benefit from, through increased demand from various investors based on their different reasoning.
GlobalCapital: Several SSA issuers have enjoyed greater central bank and official institution participation in their euro syndications this year, and higher participation from Asian investors. Has that been the same for the EU? And if so, what do you think is driving it? And do you think it is part of a rotation out of dollar assets?
EC: As I just explained, we benefit from being seen as an anchor of stability.
The EU’s bonds are an attractive investment opportunity for investors seeking stability, credibility, liquidity and safety.
Investors outside Europe also showed this in our last transaction. Around 25% was bought by investors outside the EU and the UK.
In terms of investor type, traditionally we have good relationships with central banks and official institutions, and they continue to represent an important share of our allocation.
Some investors are restructuring their existing euro portfolios, others are changing their currency split. The increased demand we receive is down to a mixture of both.
