In mid-March, amid rising interest rates around the world, the EU brought a single-tranche €9 billion 15-year deal to the capital markets.
This was the fifth transaction under the Support to mitigate Unemployment Risk in an Emergency programme and the second EU capital markets funding operation in 2021.
The EU had been quick out of the blocks as a new joint sovereign issuer towards the end of 2020, attracting large order books for its first deals in a quiet final quarter.
Now it was coming to a primary market more crowded with other highly rated borrowers and with a deal due to mature in 2036 amid a bond market sell-off.
There were some nerves.
But the deal attracted €86 billion of orders within 90 minutes and priced at 2.6 basis points below the 2036 OAT.
Buying bigger
Not all DCM bankers thought the EU would be able to borrow below France last October: several expected it to pay a premium. But investors have quickly embraced the single EU issuer and are buying much bigger blocks of its bonds: €100 million lots, instead of €10 million.
As important as this strong demand, EU commissioner Johannes Hahn has disclosed that the EU will indeed be offering short-term bills when it starts funding the much bigger Next Generation recovery programme in the summer.
The key question is whether a single EU T-bill market eases the path to capital markets union and shifts the burden of financing Europe’s recovery
Having raised €62.5 billion in its first five syndicated transactions, it will move on to auctions and establish a primary dealer group to bid on these.
These steps have been obvious since the NextGen budget was first agreed in the summer of 2020. They could be transformative for European capital markets.
Time pressing
While banks wait to see the terms attached to participating in the primary dealer group, time is already pressing.
Every country has to ratify the NextGen budget and the recovery funds then must be raised and distributed fast if the latest lockdowns are not to further scar the economy.
Soon comes the real business of establishing a single T-bill market for Europe – representing a claim not just on its strongest sovereign, Germany, but rather on the whole EU block – and creating a clear benchmark through regular issuance all along the maturity curve.
It remains to be seen if only primary dealers will be allowed to lead syndicated deals and what commitment will be required to secondary market liquidity.
Some banks withdrew from European sovereign primary dealer groups in 2018 and 2019, but they will be unlikely to turn down the chance to be in this group given the size and importance of borrowing to come. And the EU has a chance to design a primary dealer framework for today’s capital markets, not those of the last century.
The key question is whether a single EU T-bill market eases the path to capital markets union and shifts the burden of financing Europe’s recovery, and especially its SMEs, away from bank balance sheets and into the capital markets.
Much has gone well here in a short space of time; much remains to be done – and an awful lot is at stake.
