European Union commences borrowing in October
The European Commission, under the leadership of Budget Commissioner Johannes Hahn, has issued SURE bonds since October 2020 to fund temporary support for member states' short-time work schemes and similar measures aimed at protecting jobs during the COVID-19 pandemic. Initially, the SURE instrument had a volume of €100 billion, backed by guarantees from member states.
By April 2023, over €350 billion of the approximately €398 billion in outstanding EU debt stemmed from borrowing schemes started since October 2020, with SURE bonds accounting for a significant share of this. The purpose of SURE bonds was to provide financial support to member states to reduce unemployment and maintain labor market stability.
The issuance of these bonds represented a significant increase in EU debt and changed the nature of the EU as a borrower. The Commission adopted a comprehensive borrowing strategy involving syndicated transactions and auctions with a large primary dealer network. The abundant supply of EU bonds, including SURE issuance, challenged investor absorption compared to other sovereign, supranational, and agency (SSA) issuers, causing a slight increase in swap spreads by a few basis points. However, the large availability also potentially enhanced liquidity and could partly reduce the yield premium related to lower liquidity relative to other issuers.
Commissioner Hahn announced the SURE bonds to finance this short-time work scheme, aiming to support employment and economic stability across the EU during shocks such as the pandemic. The market has broadly accepted these bonds, though with some costs reflected in spreads, balanced by improved liquidity from large issuance volume.
Looking ahead, Commissioner Hahn plans to launch the first European bonds for the EU's short-time work scheme "SURE" in the second half of October. A second, larger tranche of SURE bonds will follow in the first half of next year, with the total SURE volume set to reach up to 100 billion euros.
Regarding the EU's future plans, Commissioner Hahn expressed confidence that the financial market will be receptive to the EU bonds for "Next Generation EU" as well. However, specific details about the volume, timing, maturities, and repayment schedule for these bonds were not provided in the article.
Despite the lack of explicit new announcements about fresh SURE bond issuances post-2023, the SURE scheme under Commissioner Hahn's oversight has been instrumental in the EU's borrowing strategy and crisis response. The commission aims to serve the bond market with different maturities, with the average maturity set at 15 years, ranging from three to 30 years.
Commissioner Hahn also emphasised that the new EU bonds are seen as a benefit for the cohesion of the currency union. He stated that the market responds very positively to the European bonds, with massive interest due to the quality of the bonds. He did not indicate if the EU bonds for "Next Generation EU" will contribute to the cohesion of the currency union, but he expressed confidence that there will be no lack of acceptance of these bonds.
In summary, the SURE bonds have been a significant financial support mechanism for member states during crises like the COVID-19 pandemic. The bonds have been widely accepted by the market, despite some costs reflected in spreads, and have enhanced liquidity in the bond market. The EU's future plans include issuing EU bonds for the "Next Generation EU," but specific details about these bonds are yet to be disclosed.
Other finance sources may be required to cover any potential funding gap as the EU approaches the maximum limit of its borrowing capacity, given the ongoing SURE bond issuances and the planned issuance of EU bonds for the "Next Generation EU". The European Commission, in its bid to maintain stability in the business sector, will continue to explore various funding options to ensure the success of its crisis response mechanisms and the economic recovery of its member states.
