Although the European Commission has long been able to issue bonds, it has been a rather rare guest on the capital market. In 2020, everything changed.
During crises, it is important to steer financial flows in the right direction. Public capital alone is not enough. The financial market has a special role to play in mobilising private capital in the fight against Covid-19 and its consequences.
The capital market’s response was not long in coming. Many supranational issuers successfully issued bonds to support countries, industries and populations hard hit by Covid-19. These bonds proved themselves suitable instruments in the fight against the economic impact of the pandemic.
And so it was that bonds came into focus as part of the European Union’s fourth financial aid programme – the Support to mitigate Unemployment Risks in an Emergency programme – and made the Commission one of the largest social bond issuers overnight.
However, that was only the beginning. SURE was just a test run for a much more ambitious funding project, Next Generation EU.
There is much to do on the sustainability front. We must continue to address the issues defining the future of Europe and the planet and build a more sustainable economy.
Covid-19 must not be used as an excuse to ignore environmental challenges. This would have consequences that are irreversible and far more serious than those resulting from Covid-19.
This is where the so-called green recovery comes into play. The EU’s long-term budget, coupled with NGEU, will be the largest stimulus package ever financed in Europe. A total of €1.8tn will help build a post-pandemic Europe. The European green deal is a growth strategy for a more sustainable, resilient and future proof economy.
NGEU can raise up to €800bn through bond issuances. The centrepiece of NGEU is the recovery and resilience facility, an instrument to offer grants and loans to member states, with a total value of €723.8bn in current prices.
To finance NGEU, the Commission will borrow on the capital markets. The borrowing will be concentrated in 2021-26. All borrowing will be repaid by 2058. The size of borrowing translates to roughly €150bn per year.
The Commission will seek to raise 30% of funds through green bonds. This will help access a wide range of investors, in particular environmental, social and governance-focused ones, and cement Europe’s leading role in sustainable finance markets. Green bonds will help support Europe’s economic transition on advantageous financial terms. The green bond market also stands to benefit, with others following the Commission’s example. Finally, it provides portfolio managers with a safe green asset to help diversify their portfolio.
The recovery agenda must be seen as an opportunity to build a more sustainable future rather than simply a return to the past. We must repair the short-term damage from the crisis in a way that also invests in our long-term future.
We have no stronger asset to meet this challenge than the single market. After its successful entry into the social bond market in 2020, the EU will also become a giant in the green bond market. The planned issuance would more than double the volume of European green bonds.
Given the complexity of the borrowing, the Commission is putting forward a debt management policy on a par with that of some of the most advanced EU sovereign borrowers. This will mean issuing across the entire yield curve, from short-dated bills to bonds with maturities of up to 30 years.
Furthermore, the issuance activity will attract investors to Europe, bolster the international role of the euro and demonstrate the cohesiveness and robustness of the euro area.
Frank Scheidig is Global Head of Senior Executive Banking, DZ BANK.
This article was originally published in OMFIF’s Global Public Investor 2021.