EU Lays Out $1 Trillion Debt Plan to Challenge Treasuries

The European Union set out its blueprint to raise nearly $1 trillion of debt over five years as it seeks to fund its recovery from the coronavirus pandemic.

The bloc is aiming to issue the first debt under its NextGenerationEU stimulus as early as July and will use a “state of the art” platform to begin selling bonds and bills via a network of primary bank dealers by September, according to the bloc’s executive branch. Almost a third of the roughly 800 billion euros ($957 billion) will be in green bonds, using a framework of rules to be published in early summer, with issuance as early as the fall.

“The Commission will need to execute financing operations up to EUR 150-200 billion per year over the period to end 2026,” the EU executive said Wednesday. “By June 2021, the Commission will be ready to begin mobilizing the funds.”

It highlights the ambition of the EU’s first meaningful entry into bond markets, which will see the total of outstanding bonds closing in on that of Spain’s this decade. It also lays the foundation to challenge U.S. Treasuries in coming years as a haven asset, providing a boost to integration in the region and for its common currency.

Still, EU member states still have to ratify the recovery proposals and a number of hurdles have arisen that could delay issuance. In Germany, there is a challenge to the package going through the courts, while in Poland a junior coalition party has also committed to opposing it.

“We have no time to lose,” said Johannes Hahn, the EU’s budget commissioner, during a press briefing. “I appeal to all member states to speed up the process.”

Bonds will be issued and regularly sold across a range of maturities from between three and 30 years, while there will also be short-dated bills, according to the Commission. It highlighted the latter as a quick way to raise money, at least in the early phase of the program. The program is 56 billion euros more than initial plans outlined last year that were predicated on 2018 prices.

Hahn said that the Commission would need around 15 billion euros per year in extra revenue in order to service interest on the debt.

Investors are likely to be keen. The bloc began selling social bonds tied to the funding of a jobs program last year, and those sales have broken global demand records. The EU will begin to issue debt via auction for the first time, as well as syndications via banks. The new platform will be provided by a national central bank that is already used by one of the “large sovereign issuers,” according to the document.

The NGEU package includes grants and loans to member states. The loans will have 30-year maturities, with a grace period of 10 years as nations emerge from the crisis.

“It’s no exaggeration to say our NGEU program will be a game changer on the capital markets,” said Hahn.

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