The first issue is scheduled for June, but only if all Member States have completed the ratification process of own resources.
The European Commission plans to borrow around € 150 billion per year on capital markets until 2026 to finance the Next Generation Eu. All the loans will be repaid by 2058. To raise the 807 billion euros of the plan (750 billion at 2018 prices), the EU executive will adopt a diversified financing strategy. Each year Brussels will decide on loan volumes and every six months will communicate the key parameters of the financing plan, to offer transparency and predictability to investors and other stakeholders.
Eurobond and Eu-Bills
The financing instruments will be multiple and will include: medium and long-term bonds (from 3 to 30 years) and “EU bonds”.
“With Sure, the Commission has already issued reference bonds with different maturities (from 5 to 30 years). The Next Generation Eu issuance program will give the Commission the opportunity to consolidate a regular presence on all parts of the yield curve with the most liquid Eu-Bonds possible. Rather than issuing new bonds with new maturities, the Commission will increase, where possible, the amount of bonds already issued ”, explains the executive in a note. 30% of the necessary resources, recalled the President of the European Commission Ursula von der Leyen, will be raised through the issue of green bonds.
The Commission will also start issuing bonds with a maturity of less than one year – which will be known as Eu-Bills (“EU bills”). This will give the EU the flexibility to determine the size of each transaction based on real liquidity needs. The EU executive will opt for “a mix of auctions and syndications to guarantee cost-effective access to the necessary financing and at advantageous conditions”.
An ad hoc strategy
“Next Generation Eu marks a turning point for European capital markets. The financing strategy will make the plan’s lending mechanism operational – said Johannes Hahn, Commissioner for Budget and Administration -. We will thus have all the necessary tools to relaunch social and economic recovery and promote our green, digital and resilient growth. The message is clear: as soon as the Commission has been legally authorized to take out loans, we will be ready to go “
By using a wide range of maturities and instruments and by making loan operations more predictable, the Commission will ensure greater market absorption capacity. Furthermore, some flexibility in deciding when to execute financing operations and according to which financing techniques or instruments will allow the Commission to obtain the desired low cost and low execution risk, in the interest of all Member States and European citizens.
The timings
The first issue is scheduled for June. “The Commission will be ready to go to the markets as soon as the Member States have completed the ratification process,” Hahn stressed
The actual timetable will therefore depend on the approval by all 27 member states of the decision on the own resources of the EU budget, which will give the Commission the power to borrow for the Next Generation EU. There are 17 countries that have already completed the process. Germany, Estonia, Poland, Hungary, Austria, Finland, Romania, the Netherlands, Ireland and Lithuania are missing.
In Germany, ratification suffered a setback, after the Federal Court decided to suspend it following an urgent appeal on the legitimacy of the constitution presented by the economist Bernd Lucke, founder and former leader of the far-right party Alternative für Deutschland.
“I appeal to the countries that have not yet approved the decision on their own resources” to the Union budget “to speed up the process. We respect every constitutional rule “, such as that of the German Constitutional Court, Hahn declared in this regard,” remaining confident that any necessary procedure will be finalized in due time in order to start the loan program as planned, at the beginning of the second semester. . Companies, regions, citizens have no time to waste ”.
Own resources
The European Commission is working on three ways to collect between 13 and 15 billion euros a year of own resources, or new revenue for the EU budget, to cover the costs of the debt it will issue to finance the Recovery plan. The first hypothesis is to expand the EU emissions trading system (ETS), which would represent about half of the revenue, the second is a new mechanism for adjusting CO2 emissions at the borders, and the third is a tax on the digital.
The regulations indicate the provisions for calculating and simplifying the Union’s revenue. And then those for cash flow management and monitoring and inspection rights. The package also includes the introduction of a new tax on plastics, before a series of new sources of revenue to be defined between now and 2026. Once the decision on own resources has been ratified by the states, the package approved by the Parliament it will apply retroactively from 1 January 2021 and will allow the Commission to go to the markets to finance the Next Generation Eu.