EU’s next-generation issue will strengthen euro reserve status

The Next Generation European Union fund has exceeded all expectations with the first bond deal for its € 800 billion program, launched on June 15, prompting issuers, investors and bankers to announce its potential impact on capital markets of the euro.

The deal attracted an order book of more than 140 billion euros over a 10-year period, encouraging next-generation EU borrowers to increase the size of the bond issue to 20 billion euros. euros compared to initial expectations of around 10 to 15 billion euros. The deal’s main managers – a group that has sparked much speculation over the exclusion of some of Europe’s biggest bond houses – have signaled orders from more than 600 investors around the world.

A group of market participants, speaking at a panel at an AFME / OMFIF event on European financial integration on the day the bond was issued, said they were excited not only by the reception of the agreement, but also by the positive implications to more a safe asset and a cornerstone of global financial markets.

Kalin Anev Janse, CFO of the European Stability Mechanism, welcomed a new member of the borrowers club “Team Europe”, joining the European Investment Bank and the ESM itself. The issuance of NGEU would help bring the pool of safe euro assets to around € 2 billion from € 1 billion, not only generating more liquidity, but also “bringing a lot of investor confidence, thanks to the positive EU response to the pandemic, ”Janse said.

MES saw it on its own recent show. “The perspective of international investors on the euro is changing,” Janse said. “In the last two or three years we’ve seen more central banks buy euros. Last year, 44% of ESM’s bonds were sold to central banks around the world. ‘

Fears that European national governments will see their access limited by the EU’s new issue have been exaggerated. In fact, the opposite could be true, according to Pablo de Ramón-Laca, director general of the Treasury and financial policy at Spain’s Ministry of Economic Affairs. “Away from foreclosure, we think we can be crowded by the NGEU show. This type of issue strengthens the euro’s safe asset status and attracts more large international investors who wish to buy European sovereign debt. It is a historic event.

Leonique van Houwelingen, managing director of European activities at BNY Mellon, warned that more work needs to be done in the euro area to promote the single currency as an attractive safe asset for global investors. “Do we have the infrastructure to foster liquid markets across Europe? Not without banking and capital markets union. We need to break down the barriers and complexities that remain in 27 different jurisdictions. ‘

Since its creation over 20 years ago, the euro has struggled to strengthen its role as an international reserve currency. When national currencies were merged, they represented about 20% of world reserves. In the first decade of its existence, the euro soared to around 27% of global reserve holdings. But the eurozone crisis pushed the currency back as a safe asset, falling back to a level of around 20%, where it remains today.

Michala Marcussen, group chief economist at Société Générale, said that while the NGEU fund was currently a temporary facility, with a mandate to raise funds until 2026, “the issuance of a first bond of this size is important “. I hope that this instrument will form the foundations of a safe, deep, liquid and continuous asset for the euro. ‘

Frank Scheidig, global head of senior management banking at DZ Bank, suggested that the successful launch of NGEU could provide the necessary impetus for the European project. “This is one of the steps we must take if we want to achieve carbon neutrality. If Europe wants to be significant, and a leader in this field, we can no longer waste time. We need the union of banks and capital markets.

Vítor Constâncio, former vice-president of the European Central Bank, said the NGEU program was a “game changer”, especially in the way its proceeds will be distributed. “I hope this will be a first step towards something more meaningful in terms of CMU. We need a market of EUR 3-4 billion for the euro to have the depth and liquidity of a safe asset around which the future of the euro area can be built.

De Ramón-Laca congratulated the NGEU fund borrowing team for the way they brought the deal to market and set up the issuance plan. “I must congratulate the Commission team. They have always behaved like a debt management office, setting up a prime dealership and creating a level playing field to provide liquidity, ”he said. He also expressed hope that the EU would continue to issue after 2026. “This is a temporary facility, but it can be interpreted as a pilot program – and a chance to show that a common goal can be used to induce growth. If so, it would be natural to continue. This is our opportunity to be missed.

The NGEU bond turned out to be a non-opportunity for a number of the world’s major investment banks, as Global Capital first reported. The European Commission has excluded from the deal up to 10 banks that have been found guilty in the past of violating EU antitrust rules. Major American banks – including Citi, Bank of America and JPMorgan – were notably on the exclusion list. But it also contained a number of European banks, such as Deutsche, Natixis and UniCredit.

BNP Paribas, DZ Bank, HSBC, Intesa Sanpaolo and Morgan Stanley were the roles assigned as joint lead managers, with Danske and Santander as co-managers. Scheidig of DZ Bank said that “the fact that on a deal of this size and importance, three of the five prospects were from central Europe, with a UK bank with a strong Asian presence and a US bank, as well as two European co-directors, shows the power of the European banking system.

Clive Horwood is editor-in-chief and deputy director general of OMFIF.


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