Who gains and who loses with the common European debt
Facts, numbers and considerations on the placement of bonds intended to finance the Next Generation EU. Giuseppe Liturri's analysis
Yesterday the Commission published the outcome of a bond placement intended to finance the Next Generation EU and aid to Ukraine and we had yet another confirmation of why many hold back when it comes to starting new debt-based initiatives common European. Whether it's called Sure , the European Sovereign Fund, NextGenUE or Pippo, the problem is always the same: already at first reading it is not convenient for many European countries and, with a more careful analysis, not even for Italy.
The Commission has placed securities for 3 billion with a 7-year maturity and for 4 billion with a 20-year maturity, in the form of a direct placement with a consortium of underwriting banks. The Commission alternates this form with the classic auction.
Demand was as usual very strong, 12 to 14 times the supply. And that's no surprise, because it's a great deal for investors.
In fact, the 7-year bond offered a yield of 2.92%, a good 55 basis points more than the equivalent German Bund and, above all, 24 basis points more than the equivalent French bond.
The 20-year bond offered a yield of 3.26%, again 85 basis points more than the German bond and 16 points more than the French bond.
With these 7 billion, the total amount collected up to now rises to 20, out of the 80 billion which are the emissions target declared in the first half of the year. 70 of which will be directed to NextGenEU and 10 to aid to Ukraine.
But with those rates, the accounts do not add up. The Germans and French are not the only ones in Europe who can borrow at lower rates. Belgium, Denmark, Finland, Holland, Ireland, lower yields appear on ten-year maturities than bonds issued by the Commission.
Then the reluctance trend of these countries towards new common debt is immediately explained. Why should they borrow from the EU at a higher rate if they have cheaper alternatives available? Not surprisingly, the NextGenEU fund still has around 200 billion in loans not requested by anyone, for exactly this reason.
Since these EU issues enjoy a triple A rating exclusively thanks to the (separate and non-solidarity) guarantee of the Member States to the extent of 0.6% of their respective GDPs and Germany, alone, could repay all the installments starting from 2026 even if all 26 other member states fail, many states in the EU wonder why they join a fund that only sees them provide guarantees and refrain from receiving relatively expensive loans.
For Italy the situation changes. In fact, our ten-year debt costs 120 points more than the EU one. An only apparent benefit that risks being completely eliminated by the EU's role of privileged creditor. It is normal that it costs less to borrow from a privileged creditor, as happens in the bank when you take out a mortgage loan instead of an unsecured one. Furthermore, we must not forget the conditions that assist those loans, the onerousness of which we are appreciating in these days, forced into arduous negotiations to change even just a few commas of the PNRR. Conditions whose onerousness will also manifest itself in the future because, by purchasing from foreign suppliers (a large part of the ecological transition supply chain is not in Italy), the effect on GDP is modest and in any case the restrictive effect of a budgetary policy dictated by the (old and harmful) rules of Brussels.
In short, EU funds are a Trojan horse. Meanwhile, investors thank for the gift and celebrate.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/debito-comune-europeo/ on Thu, 16 Feb 2023 08:43:54 +0000.