What is the unified funding approach to EU borrowing?
The unified funding approach is the strategy that the Commission will be following to place the debt that it issues on behalf of the EU on capital markets.
Under this approach, the Commission will be issuing single branded “EU-Bonds”, rather than separately denominated bonds for individual programmes such as NextGenerationEU, SURE and Macro-Financial Assistance (MFA). The Commission will be collecting all proceeds in a central funding pool and internally allocating them to various policy programmes funded through bond issuances. This will avoid the fragmentation of EU issuances and support a more homogenous secondary market for EU-Bonds.
The unified funding approach will allow the tool-box developed for NextGenerationEU to be used in the same way for other lending programmes. Under the new approach, the Commission will continue to use a mixture of auctions and syndications to place its EU-Bonds. To boost the liquidity of its EU-Bonds, the Commission will make greater use of auctions, and will keep issuing short-term EU-Bills.
The programmes to be financed through the unified funding approach in the first half of 2023 are the NextGenerationEU recovery programme and the new Macro-Financial Assistance + programme for Ukraine. The former will account for some €70 billion, and the latter for around €10 billion. This will also be the Commission's main approach to markets for other borrowing going forward. Back-to-back funding will remain an option for EU issuances on an exceptional basis when warranted by specific transaction needs.
The Commission will continue to finance the green component of the Recovery and Resilience Facility at the heart of NextGenerationEU through clearly and separately designated NextGenerationEU green bond issuances. In this way, investors will remain able to verify that proceeds from the NGEU Green bonds are over time matched to eligible green bond expenditures in accordance with the NextGenerationEU green bond framework.
What are the benefits of the new approach?
Thanks to this approach, the Commission will be able to plan, execute and communicate all issuances in an agile and coherent way, via a single EU-Bond label. It will also make use of the full range of its funding instruments and funding techniques to cover its funding needs, thus obtaining the most advantageous terms possible at that time. Under this approach the Commission will apply a uniform robust risk, compliance and governance framework to all borrowing operations, and solidify its presence in the capital markets as a regular large issuer supported by a tested and proven issuance infrastructure.
This will enable the Commission to obtain more attractive conditions, which will be passed on to the beneficiaries of its funding programmes. The Commission will have greater flexibility on the timing of disbursements, thus being able to better address beneficiaries' needs, including Ukraine.
Finally, the single-branded EU bonds will also be easier to buy, sell and substitute in investor's portfolios. This will help make EU securities more liquid, and improve their pricing and trading in the secondary market.
How will the new approach affect the beneficiaries of EU borrowing?
The single branded EU-Bonds securities will enhance the liquidity of EU-Bonds in the secondary market, which is expected to positively impact their pricing.
This means that the EU will be able to provide loans to Member States' under the Recovery and Resilience Facility and to Ukraine under the Commission's Macro-Financial Assistance + programme at the best possible terms, in line with the credit rating and scale of the EU as an issuer.
The Commission will also be able to disburse funds in a more flexible way, which will also be of added value to the beneficiaries of EU funding via borrowing.
What will the Commission do to improve its stance on the secondary market?
Moving from fragmented policy-by-policy issuance towards a unified funding approach will already make EU securities more fungible and liquid. To further boost the liquidity of EU-Bonds, the Commission will:
-Prepare, with the banks from its Primary Dealer Network, a framework for providing investors with pricing quotes on EU securities. These quotes will be displayed through the trading platforms used by financial professionals. Preparation will start in early 2023 with a view to introduce these new quoting commitments from summer 2023.
-In addition, the Commission will start building a repo facility to support market participants in trading its bonds. Through the repo facility, the Commission will make available its securities on a temporary basis, thus helping EU Primary Dealers to provide liquidity in EU-Bonds. This repo facility will be implemented by early 2024.
How does the new approach impact the funding plan for H1 2023?
The funding plan for the first half of 2023 is the first one, under which the Commission will be using its unified funding approach to place its securities.
Between January and June 2023, the Commission intends to issue up to €80 billion of long-term EU-Bonds, to be topped-up by short-term EU-Bills.
Some €70 billion of the funds to be issued will go for the NextGenerationEU recovery programme, and the remaining €10 billion will go to the new Macro-Financial Assistance + programme for Ukraine.
Under the new approach, the Commission will continue to use a combination of auctions and syndications to place its EU-Bonds. To achieve greater liquidity of its EU-Bonds, the Commission will make greater use of auctions. Short-term EU-Bills will also continue to be issued via auctions.
When will the Commission proceed with the first disbursement to Ukraine?
One of the benefits of the unified funding approach is that it would enable the Commission to decouple the EU-Bonds issuances from the disbursements.
On this basis, the Commission will be able to use the unified funding approach for its programmes financed via capital markets funding going forward.
This will include the Macro-Financial Assistance + programme of up to €18 billion for Ukraine proposed by the Commission on 9 November 2022 and endorsed by the European Parliament and EU Member States in the Council by mid-December. With this package, the EU will be able to provide to Ukraine highly concessional loans, thus becoming the first international partner to secure a stable and predictable support to the country in 2023.
The unified funding approach will enable the Commission to use funds that are currently available in its central funding pool to disburse funds to Ukraine once all the legal agreements between the Commission and Ukraine are in place. The first disbursements are expected already at the beginning of 2023.
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