In September, the EU will launch its first auction of short-dated EU-bills, as part of a NextGenerationEU funding programme scheduled to raise €80 billion in the second half of 2021.
It had already raised $45 billion by the end of July, through three syndicated issues of long-term bonds, including a €20 billion 10 year that was its largest single tranche deal to date, and a €10 billion 20 year that drew a record €100 billion of investor orders.
It will now alternate between syndicated new issues of long-dated bonds and auctions for tapping existing lines through a primary dealer network of 39 institutions. This counts for the first time banks from Spain, Greece, Belgium, Sweden, Finland and Austria as well as 12 subsidiaries of non-EU parented groups, including the big five US banks.
The EU’s latest presentation to investors discusses raising tens of billions in EU-bills, implying auctions of short-term debt might make up the majority of what remains to be done in the next few months. It will set dates for bill auctions in September and target maturities of under one year.
The EU has set a maximum limit of €60 billion of EU-bills, equating to 8% of its €800 billion total funding programme
The EU is now developing a sovereign funding programme and most EU sovereigns fund through auctions of three- and six-month bills as well as 12-month paper. As the EU bill programme is designed to offer flexibility in meeting disbursements of grants and loans to member states, investors still await details on auction sizes as well as maturities.
As to liquidity, the EU has set a maximum limit of €60 billion of EU-bills, equating to 8% of its €800 billion total funding programme.
Bank of America analysts calculate that as being in line with the average mix for big EU sovereigns, with short-term bills accounting for 8% of outstanding French debt, 10% of German and 5% of Italian debt.
Whether this is a pivotal moment for EU capital markets remains to be seen.
Safe asset
A recent policy paper from the Jacques Delors Centre points out that a new safe asset could achieve great things by providing high-quality, liquid collateral for financial transactions, preventing adverse shocks from triggering a flight-to-safety as in the European sovereign debt crisis, and facilitating diversification of banks’ sovereign portfolios to break the infamous doom loop.
But it will be difficult for EU-bills and bonds ever to achieve that safe asset status while NGEU borrowing is still classed as a temporary response to Covid, with outstandings to be repaid in the decades after 2028.
Making it permanent will require political compromises. A couple of useful near-term boosts would be distribution targeted to investors such as hedge funds and bank traders (not bank treasuries) that might foster a liquid secondary market. It would also help if the ECB treated EU-bills and bonds in the same way as it treats eurozone sovereign bonds.
For now, it still treats them as supranational instruments that attract higher haircuts than sovereigns, making them less attractive for banks to use as collateral when raising funds from the ECB.
Over to you, Christine.
