EU to use bond auctions to sell debt for 800-billion-euro recovery fund


© Reuters. FILE PHOTO: Euro currency bills are pictured at the Croatian National Bank in Zagreb

By Yoruk Bahceli

AMSTERDAM (Reuters) – The European Commission will use bond auctions to sell some of the debt to back its coronavirus recovery fund, the commissioner for budget and administration said on Thursday.

Details about the tools the EU will use to increase its small debt pile to take on large liabilities have been a key focus for markets for weeks. Reuters first reported last week that the EU was exploring bond auctions.

“Next Generation EU will be a complex funding machine… in that respect we are currently strengthening our capacities,” Commissioner Johannes Hahn said at an online panel discussion at the IMF-World Bank Group annual meeting.

“We will move away from an exclusive reliance on syndicated transactions towards use of some auctions.”

Auctions, where banks acting as dealers for the borrower purchase bonds and sell them on to investors, are almost exclusively used by governments.

The European Stability Mechanism bailout fund is the only other supranational that auctions debt.

“It’s underscoring that the EU has the ambition to not just become another… supra(national) issuer but rather to become the supra benchmark which is closer to sovereign issuers than any other supra out there,” said Christoph Rieger, head of rates and credit research at Commerzbank (DE:).

Before starting to finance the recovery fund next year, the EU first has to fund the SURE unemployment scheme, for which it will start selling bonds this month via syndication, where banks it hires sell bonds directly to investors.

Hahn added that the Commission would codify its relationship with bank counterparties to ensure efficient financial support.

Dealer banks running auctions are usually responsible for providing liquidity in the secondary market, to ensure orderly trading.

The Commission will also support its issuance through liquidity-management tools and support a liquid secondary market in its bonds.

Hahn added the recovery fund would raise around 800 billion euros ($937 billion), with the 750 billion euros previously communicated having been in line with 2018 prices.

The fund has yet to be ratified, with member states divided over a scheme that ties access to the money to respecting the rule of law.

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