European Union Bond Issuance Set To Increase Rapidly In The Coming Months

Aug. 25, 2020 6:10 AM ET
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Summary

  • The EU will have to issue EUR850bn worth of bonds in the coming years in order to cover needs for the SURE scheme and the EU Recovery Fund.
  • The EU will be allowed to require additional financial backup from Member States in the event one or more countries are unable to meet their commitments in any given year.
  • Principal payment of the upcoming EU bond issuance should be manageable by the existing AAA/AA countries alone.
  • Deepening of the EU bond market provides a new alternative for low-risk euro investments.

The EU Recovery Fund and SURE

In order to address the challenges posed by the COVID-19 pandemic, the European Union created SURE unemployment insurance scheme and the EU Recovery Fund.

SURE (Support to mitigate Unemployment Risks in an Emergency) is designed to help protect jobs and workers affected by the coronavirus pandemic. It will provide financial assistance, in the form of loans granted from the EU to Member States, of up to EUR100 billion in total. The scheme is likely to be fully subscribed as at least eighteen member states have submitted expressions of interest for loans so far (EUR95 billion in total). According to the EU officials, bond issuance will begin in late September and end by June 2021. As a result, a steady issuance of around EUR10bn per month can be expected during the mentioned time frame.

The EU Recovery Fund is worth EUR750 billion in total. Although there is currently no precise timetable for disbursements, we do know that the Recovery and Resilience Facility is worth EUR672.5 billion in total and that 70% of the grants shall be committed during 2021 and 2022. The remaining 30% shall be fully committed by the end of 2023. This brings us to the conclusion that at least EUR470 billion worth of bonds should be issued during 2021 and 2022 (roughly EUR20 billion per month).

This suggest that the EU would be issuing up to EUR30 billion per month during the first six months of 2021 in order to cover the needs of both SURE and Recovery Fund, and roughly EUR15-20 billion afterwards until the end of 2023.

AAA rating should be maintained

On 25 February 2020, Fitch affirmed the EU's AAA long-term rating with stable outlook and stated: “As supranational administrative bodies, the EU's and Euratom's 'AAA' ratings are ultimately based on the

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I serve as financial analyst in banking industry for four years and I am mainly focused on fundamental analysis and long-term investments in Europe, USA and Japan. I cover EUR,USD, CHF, JPY, GBP, AUD, NZD and CAD as well as commodities. Recently, I started investing by my self predominately in EUR/USD and gold, but also ussing other oppurtinites depending on the market situation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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