Speech of Commissioner Hahn in the ninth joint DZ BANK – Official Monetary and Financial Institutions Forum
Speech given by Commissioner Hahn in the ninth joint DZ BANK – Official Monetary and Financial Institutions Forum.
"Check against delivery"
Ladies and gentleman,
Thank you very much for the invitation to this panel discussion and for giving me the opportunity to share with you my thoughts not only about the Recovery plan for Europe but also about how to finance it in sustainable manner.
The big picture
The coronavirus pandemic has plunged Europe into its deepest contraction since World War II. The EURO area economy is foreseen to contract by about 8.75% in 2020 before recovering at an annual growth rate of 6% in 2021, thus an incomplete recovery in comparison to the GDP registered before the crisis (2% smaller than end of 2019).
This has prompted a strong and coordinated European response, as Member States understood the need for collective action to minimise the economic contraction and lay the grounds for a sustained and sustainable recovery.
As the central pillars of the EU joint fiscal response, the SURE programme will support Member State temporary employment schemes and the ground-breaking Recovery Plan. These will provide a powerful fiscal stimulus (7% of GDP) to the EU economy in 2021 and support an investment-led recovery. Future-orientated investments will power sustainable growth and digital transformation.
These new programmes will change EU debt capital markets. SURE and the Recovery Plan will be financed by Union borrowing through bond issuance projecting the EU into the major league in global debt capital markets.
We will issue nearly €1 trillion in bonds over the period to end 2026, volumes comparable to the largest sovereign issuers in Europe.
The emergence of a new triple-A-rated issuer has attracted much interest. Will the forthcoming EU issuance constitute Europe's new “safe asset”? Only time will tell, but we will certainly work tirelessly to ensure that our bonds will be a successful staple of European fixed income capital markets.
We cannot predict today the needs of tomorrow, but we will use the opportunity to establish the capacity and credentials of the EU as a reliable and credible issuer for any event in the future.
The current interest from international investors in our issuance is rising. Undoubtedly, this is linked to the excellent credit worthiness of the Union as an issuer. The Recovery Plan, supported by a joint borrowing programme NextGenerationEU (NGEU) worth €800 billion, reinforces this confidence in the Union. Let me explain how we are preparing to implement these two programmes.
Gearing up for SURE issuance
The SURE programme, agreed by Finance Ministers on 19 May 2020, is a first visible sign of EU solidarity in crises. Its proceeds will finance loans to assist Member States in coping with increases in public expenditure to preserve employment. In only 5 months, we completed all legal and administrative preparations and are ready to launch the first issuance.
Last week, we held another Global Investor Call to update 550+ investors on the upcoming SURE issuance. This first issuance in the second half of October will be the one of several transactions to raise around €88 billion, which will flow to 17 EU countries. More support of up to €100 billion is available for other countries.
The recent decision to issue SURE bonds as “social bonds”, based on a new Social Bond Framework, will be a game changer for the global social bonds market. Doubling the amounts of outstanding social bonds demonstrates the EU's long-term commitment to sustainable financing.
SURE is a first step in the increase of the Union's issuance over the coming years making the EU one of the largest bond issuers in the EU and the world. It can be seen as an “appetizer” for the main course: NextGenerationEU.
Looking further down the track to NextGenerationEU
NextGenerationEU is the new recovery instrument of €800 billion to boost the EU budget with new financing raised by the European Commission. For the first time the Commission is empowered to borrow to finance Union expenditure proving the courage and vision of our political leaders at national and European level.
Almost 90% of the proceeds of the borrowing will be transferred to Member States to finance their reform and resilience plans. 37% of the funds provided for national plans have to be invested in “green” projects.
Commission is working intensively with the Council Presidency, Member States and European Parliament to swiftly agree on the MFF and NextGenerationEU. The following ratification by Member States will give the Recovery Plan and NextGenerationEU democratic legitimacy and confirm their commitment to endow future EU budgets with the means needed to meet NextGenerationEU requirements.
What does NGEU mean for the EU as an issuer?
The Commission has long been an active issuer with an established capacity and tried and trusted processes. However, funding the Recovery Plan requires an advanced approach to organising the Commission's funding operations.
NGEU will be a complex funding machine. It must:
- deliver large volumes of funds to a wide number of beneficiaries in a number of forms;
- spread maturities over time to avoid congestion in repayment needs.
We are currently strengthening our capacities:
- We will move away from an exclusive reliance on syndicated transactions towards some use of auctions;
- NextGenerationEU issuance will be supported by liquidity management tools;
- We will codify our relationships with bank counterparties to ensure an efficient financial support.
- We will support liquid secondary markets in our bonds.
- We will implement a comprehensive risk management and robust governance structure.
- Issuance will be based on regular engagement with the investor community.
- We will cooperate with peer supranational issuers for a concerted approach.
- In this line, we are investing in an upgrade of our organisation, work processes, risk-management and staffing.
I would like to close with a few words on the issuance of NGEU green bonds.
In the State of the Union speech of 16th September 2020, President von der Leyen announced a target of 30% of the amount of NextGenerationEU money to be raised through the issuance of green bonds. We will work hard on this ambitious target with tailored approaches.
We want to get this right and make it a genuine success. Reflections are ongoing on how to develop a clear methodology to identify the “green part” of national expenditures so that it can be financed by green bonds. This will require appropriate reporting by Member States.
And we have to, also because of the global meaning of the EU borrowing and lending activity. It is not just Europe's ATM. It is an important policy enabler, which will:
- Support the integration of EU capital markets
- Stimulate the development of green and social bonds
- Make the EU a much more attractive investment destination
- Strengthen the international role of the euro
And help us rebuild a greener, more digital and more resilient continent.
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