EU Recovery Fund Outlook Faces Shadow of Doubt From S&P, Pictet


The European Union’s landmark recovery fund has yet to commence, but some analysts are already voicing concern over the risk of a delay and its severe ramifications for the region’s economy.

S&P Global Ratings said it sees a delay in bond issuance to fund the 750-billion-euro ($880 billion) program to the fourth quarter, compared with current expectations for around mid-year. Meanwhile, Pictet Wealth Management said its “baseline scenario” is for the disbursement of funds to take place in the third quarter, warning that any later would pose risks to its forecast for German yields to rise to 0% by year-end.

While concerns over a delay currently appear to be a minority view, they emerged after an emergency request in Germany last week to block the legislation required for the fund. The country’s top court is expected to reach a decision on whether to issue a preliminary order to stop the law soon. Hanging in the balance is the EU’s primary economic response to the pandemic-induced recession, which has been aggravated by a botched vaccine rollout and extended lockdowns in France and Italy.

“The delay would be very negative news, especially if it’s an indefinite delay,” Frank Gill, head of EMEA sovereigns at S&P, said in an interview.

S&P’s view is predicated partly on the risk that Germany’s Federal Constitutional Court could transfer the opinion to the European Court of Justice, according to Gill. The European Commission declined to comment.

Germany’s constitutional court has sought guidance from the EU’s top court in the past. It was most recently involved in a challenge by critics of the ECB’s quantitative-easing program, asking judges whether the ECB had overstepped its powers. The EU court last year faced a stinging attack from the German judges over its 2018 decision to back the ECB, arguing the Luxembourg-based tribunal had overstepped its powers.

Quick Resolution

European Central Bank President Christine Lagarde has called for the legal attack to be “dealt with in short order” in order to free up the funds, which particularly assist the bloc’s most debt-laden nations.

EU Recovery Fund Outlook Faces Shadow of Doubt From S&P, Pictet

Bundesbank President and ECB Governing Council Member Jens Weidmann said he doesn’t expect the court to block Germany’s participation and appealed to the judges to resolve the issue swiftly. A decision is expected within days.

Optimism and Risks

The recovery fund, which will see the EU borrow money on financial markets to finance economic support measures for member states, is seen as a key pillar in the region’s battle against the fallout from coronavirus. It’s also expected to inject more optimism into European assets.

BNP Paribas SA expects European bond yields to catch up with their global peers in the second half of the year, citing a “glass half full” view on fiscal policy, among other measures. BofA Global Research sees the fund benefiting banks, capital goods, utilities and renewables.

Pictet is also a believer in Europe’s recovery, raising its year-end forecast for German 10-year bond yields to 0% from minus 0.2% previously. Yet that hasn’t stopped the wealth manager from war-gaming risks in the event of a delay to the fund.

It “could put our forecast of the 10-year Bund yield moving to 0% later this year at risk,” wrote analysts led by Thomas Costerg in a note to clients.

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