The European Union (EU) made history in 2020. For the first time, it issued joint debt, albeit the bulk of the operations are due in the years ahead.
Nevertheless, financial market participants viewed the decision as crucial for a common fiscal agenda in the EU, often criticized for its lack of fiscal discipline and unity. Not anymore.
EU Bonds – Safe Haven Assets
The chart above perfectly illustrates the dramatic changes in the European sovereign fixed income market. The SURE (i.e., unemployment insurance scheme) and the Recovery Fund dwarf any EU past funding up to 2020 combined. As a side note, yesterday, the European Commission revealed the amounts allocated to each country as part of the SURE program, with Italy and Spain, the most affected countries, receiving the most. Spain, for instance, will receive over €21 billion, being the first country that officially applied for SURE funds a few weeks earlier.
Financial markets welcomed the EU plan to finance its way out of the coronavirus mess. Moody’s, Fitch, and DBRS, they all assigned AAA, the highest rating for the EU bonds.
While the SURE program, a loan-based program, was announced in April, a few months later, the EU leaders agreed on the NGEU (Next Generation EU) and the EU budget all the way to 2027.
Acting on behalf of the EU, the European Commission will increase its bonds issuance to first fund the SURE program. This is a program designed to provide support to mitigate unemployment risks in an emergency – and COVID-19 is just that kind of emergency the program is built for. Starting with September, the European Commission will tap financial markets with a bond issuance worth about EUR100 billion, likely to be oversubscribed.
However, the biggest chunk of the European Commission issuance will come starting with 2021. The European Commission will issue bonds all the way through 2026 to fund the Recovery Plan, and again, the issuances are likely to be fully subscribed.
We can safely say that there is a new kid in town when it comes to sovereign debt market issuance. But this is not any kind of sovereign debt – these bonds belong to one of the largest economies in the world (i.e., single market economies), highly sophisticated and well educated.
When you assign to these attributes a triple AAA rating, no wonder the issuances are expected to be oversubscribed.
For once, the EU got its act together.