EU passes market test with first jumbo ‘payback bond’

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Flags of the European Union in front of the European Commission building in Brussels, Belgium.

BELGA MAG / AFP via Getty Images

Almost a year after European leaders decided to launch a vast, co-financed stimulus program to deal with the consequences of the Covid-19 pandemic, the European Union has finally delivered the first bond of which will amount to a total of 800 billion euros ($ 970 billion) in borrowings over the next five years.

The result did not disappoint: Demand for the € 20 billion 10-year bond reached € 142 billion, bankers said, and its price was 0.086%, compared to the minus 0.23% yield on German Bunds of same deadline.

Investors in search of yield may have found the embryo of a safe and risk-free asset of the type still lacking in Europe and the Eurozone, since even the German government bond market , considered the safest in the region, is less than a tenth of that of US Treasury bills in circulation.

EU officials as well as analysts and economists were quick to hail last year the historic importance of the decision of EU leaders to finally agree on some form of joint borrowing – a step towards fiscal union more integrated without which the euro zone will remain a work in progress.

But it will take tougher political decisions before EU stimulus bonds become a risk-free instrument of choice for investors.

The main reason is that the program was officially created as a one-time event, triggered by the unprecedented nature of the Covid-19 pandemic. The loan is designed to finance the EU’s € 800 billion ‘NextGenerationEU’ program, a mix of grants and loans to 27 member countries, with priority given to economies that have suffered most from the pandemic, starting with Italy and Spain.

The European Commission was due to give the green light on Thursday for the first disbursements under the program, after reviewing spending plans submitted by member states over the past two months.

But on the borrowing side, the EU is not expected to exploit markets for more than 800 billion euros over the next few years, starting with 80 billion euros planned for 2021. The bonds will be spread over different maturities. , the last to be paid back in 2058. The instrument is not meant to be permanent, its market will remain small compared to the trillions traded every day in the bond markets, and it could even run out of liquidity if bonds eventually end up, for example, in the portfolios of insurance companies and held to maturity.

But the precedent is there. Some European officials have already openly considered the possibility that this form of Eurobond could become a permanent instrument, a key element of a true fiscal union, designed to finance, for example, longer joint public investment programs. term.

This will require difficult political decisions and will involve new rounds of divisive debates among governments who do not all agree on the desirability of further fiscal integration. But at least with the clawbacks, governments can base their discussions on a real example of how such an instrument might work.

Write to Pierre Briançon at [email protected]

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