EU Borrowing and Lending Strategies PDF

BUDGpedia - Budget and Finance ALERT LEVEL For your safety: EUWARN Borrowing and Lending 28/10/2024 11:00 ​From issuing bonds...

BUDGpedia - Budget and Finance ALERT LEVEL For your safety: EUWARN Borrowing and Lending 28/10/2024 11:00 ​From issuing bonds for each disbursement to a pooled funding approach​ The Commission has been borrowing funds on behalf of the Union for over 40 years, mainly to finance loan programmes to countries inside and outside the EU that are experiencing financial difficulties, allowing them to benefit from the low rates available to the EU as a borrower with a very high credit rating. These programmes tended to be small in scale. As a result, the Commission had a relatively minor presence in international capital markets, with around EUR 50 billion in outstanding debt by the end of 2019 and EUR 450 million issued that year. However, since 2020, the EU has seen a profound transformation of its presence in and use of international capital markets as it started to implement much larger support programmes in response to the COVID-19 pandemic. For the SURE programme the Commission had to raise up to EUR 100 billion between 2021 and 2022 and for NextGenerationEU up to EUR 713 billion between 2021 and 2026. This made the Commission one the biggest issuers of new debt in euro over this period. At the time of writing (25/10), outstanding EU debt has reached over EUR 560 billion, making the EU the 5th largest issuer of euro-denominated bonds. To successfully finance bond-issuances on this scale, the Commission needed a completely new playbook. When it set up NGEU in 2021, it therefore drew up a diversified funding strategy of the type implemented by the largest euro-area sovereign issuers. In line with the best practices used by these issuers, the diversified funding strategy uses different funding instruments (EU-Bonds and EU-Bills) and funding techniques (syndications and auctions) to cover long-term and short-term funding needs. The Financial Regulation was amended in December 2022 (new article 220a) to establish the diversified funding strategy as the default funding strategy for the EU when financing financial assistance or other policies through bond issuance. This has allowed the Commission to extend the benefits of this more flexible and cost-efficient debt management strategy – that it had set up specifically for NGEU – to the support programmes for Ukraine and other potential future borrowing and lending programmes, thereby creating a unified funding approach for all EU borrowing and lending programmes. Under this unified funding approach, the Commission issues single-branded EU-Bonds, as opposed to running separately designated issuances per policy as in the past. Risk management To manage the risks that come with such large borrowing and lending programmes, the Commission has enhanced its risk management and compliance framework through the creation of a dedicated risk management function and the appointment of a Chief Risk Officer at the start of NGEU in 2021. The risks that come with the exposures arising from lending activities are managed via the EU budget. Programmes financed by the proceeds of borrowing ​The Commission uses the proceeds of these EU-Bond issuances to fund several EU spending programmes and instruments: NextGenerationEU. This instrument is the collective EU response to the pandemic. NextGenerationEU is a temporary instrument under which the Commission can raise up to EUR 713806.9 billion between mid-2021 and 2026 by issuing EU-Bonds. Up to EUR 250 billion will be raised by issuing green bonds. The centrepiece of NextGenerationEU is the Recovery and Resilience Facility (RRF) - an instrument that provides grants and loans to Member States to support reforms and investments aimed to make EU economies greener, more digital and more resilient. In addition, NextGenerationEU funds are being used to reinforce several existing EU programmes, such as the Just Transition Fund, Horizon Europe, InvestEU, RescEU and ReactEU. With NextGenerationEU for the first time the EU is issuing bonds to not only finance loans, but also expenditures. SURE (temporary Support to mitigate Unemployment Risks in an Emergency). This programme financed short-term employment schemes across the EU and keep people in jobs during the coronavirus pandemic. Under the SURE programme the Commission has provided EUR 98.4 billion in back-to-back loans to 19 EU Member States between October 2020 and December 2022. There will be no future transactions under the SURE programme as the programme has ended on 31 December 2022.  Macro Financial Assistance (MFA). MFA is financial support in the form of loans and grants to partner countries outside the EU that are experiencing a balance of payments crisis. In 2020, an exceptional MFA package was adopted to help ten partner countries to limit the economic fallout of the coronavirus pandemic. Since then, the EU has provided further MFA loans to Moldova, Jordan and North Macedonia. Several programmes to support Ukraine: The Ukraine Facility under which the EU will provide up to EUR 50 billion in stable and predictable financial support between 2024 and 2027 to help Ukraine in its recovery, reconstruction, and modernisation efforts. EUR 17 billion of this support will be in the form of grants and budgetary guarantees and EUR 33 billion will be in the form of loans. Exceptional MFA, emergency MFA and MFA+. In 2022, following Russia's war of aggression against the country, Ukraine benefitted from a total of EUR 7.2 billion of exceptional and emergency MFA support. In 2023, the EU provided EUR 18 billion in MFA+ support to Ukraine. This support came in the form of highly concessional loans, disbursed in regular instalments. This stable, regular and predictable financial assistance helped to cover a significant part of Ukraine's short-term funding needs for 2023. Exceptional MFA under the G7 'Extraordinary Revenue Acceleration for Ukraine (ERA) initiative. This initiative will provide Ukraine in 2025 and 2026 up to EUR 45 billion in loans. To help Ukraine service and repay these loans, the Commission established a Ukraine Loan Cooperation Mechanism (ULCM). The ULCM will be funded by the extraordinary revenues accumulated from the immobilisation of the sanctioned Russian Central Bank assets, as well as contributions from Member States and third countries. Western Balkan Facility. This is the financial pillar of the Growth Plan for the Western Balkans. It covers the period from 2024 to 2027 and is expected to provide up to EUR 2 billion in grants and EUR 4 billion in loans to the EU's six Western Balkan partners in the coming years. The Balance-of-Payments (BoP) assistance facility. The BoP assistance facility enables the EU to provide assistance to EU countries outside the euro area experiencing or threatened by difficulties regarding their balance of payments. European Financial Stabilisation Mechanism (EFSM). The EFSM enables the EU to provide financial assistance to any EU Member State experiencing of threatened by severe financial difficulties. More information The EU as a borrower website is a dedicated website to inform investors and the general public about the borrowing operations. In the EU securities database all the EU-Bond and EU-Bill transactions that the Commission has executed can be found. The half-yearly Funding Plan sets out how much the Commission intends to borrow in the upcoming semester. The half-yearly reports on the implementation of the EU borrowing and lending operations discusses the operations and any developments that took place in the previous 6 months. Last update: 28/10/2024 11:00 - Published by: BUDG.F.1 - Borrowing and Lending Operations - Front Office