EU Debt Issuance To Fill Gap In Shortage Of European High Quality Bonds

The bonds in circulation of the institutions dependent on Brussels could be around €1 Tr by end-2021

Intermoney | EU supranational entities’ negotiable debt in euros which can be attractive for investors amounts to nearly 588 billion euros. This figure seems low in line with the gross emissions of the EU, the ESM, EFSF and EIB which, together, have averaged 67 billion euros between 2015 and 2019. These numbers are evidence of the fact that the markets in the EU are lacking a key element such as the supranational role of quality. Now, however, this situation will start to change thanks to the Reconstruction Fund. Assuming that the bulk of its resources are consumed, one would expect the EU to issue just under 300 billion euros in 2021 and around 225 billion euros in 2022 and 2023 to finance this mechanism. In short, between the debt already issued from bodies in the Community sphere and that which is about to come as a result of pan-European aid, the bonds in circulation of the institutions dependent on Brussels could be around 1 trillion euros by end-2021.

However, before that, there will be the EU issuances to finance the mechanism known as SURE. This aims to provide cheap loans to member states to finance actions that minimise job destruction. In this case, 18 EU member states would already have requested credits for a total value of 94.5 billion euros. This situation will have led officials in Brussels to consider starting to issue 100 billion euros on behalf of the EU from end-September and up to June 2021, with issuances taking place every two weeks. These placements would not affect the rating given to the EU by the big rating agencies, according to the information leaked.

Furthermore, although the agreement in the EU is discounted by markets, it clearly represents a major turnaround in how things are done in the Community club. This will generate additional returns from the perspective of investments in the financial markets, when looking beyond the short term. In the specific case of equities, for the last century European equities have been trading at a significant discount to US equities, based on the price of the companies’ shares in relation to their book value. This situation was the result of three factors: the greater weight of high-growth technology companies in the US without a European counterpart in many cases; the favourable tax and, above all, regulatory framework in the US which benefits US firms’ profitablity; and the break-up premium of the European project, particularly the Eurozone, which has been a recurrent burden for EU assets.

Now the Recovery Plan largely dilutes the break-up premium of the European project, and this may generate an extra boost for EU equities in the coming months. A situation that will not change, even though there may be moments of doubt during the long process to approve the plan. It has yet to go through the EU Parliament and be ratified by all member countries.