The European Commission, acting on behalf of the European Union (EU), currently operates three programmes under which it may grant loans and fund these by issuing debt instruments in the capital markets:

• European Financial Stabilisation Mechanism (EFSM): support to all EU Member States, with current focus on euro area Member States, up to EUR 60 billion, activated for Ireland for up to EUR 22.5 billion and for Portugal for up to EUR 26 billion
• Balance-of-Payments (BoP) assistance: to Member States that have not yet adopted the euro; up to EUR 50 billion (EUR 11,4 billion outstanding)
• Macro-Financial Assistance (MFA): financial aid programme to assist non-Member States (EUR 592 million outstanding)

In addition, the European Commission manages the

• Package of pooled bilateral loans from Euro Area Member states to Greece; the package initially comprised a total of EUR 80 billion.

Investor presentation

>> download: European Union – Investor Presentation [2 MB]   (18 June 2013)

EU funding characteristics

• EU borrowing is raised on the capital markets and not from the budget, as the EU is not permitted to borrow to finance its ordinary budgetary expenses;
• Size of the borrowings varies from small private placements of single or double digit EUR million amounts to benchmark-size operations in the context of the balance of payment loans and the EFSM.
• Funds raised are in principle lent back-to-back to the beneficiary country, i.e. with the same coupon, maturity and amount. Notwithstanding the back-to-back methodology, the debt service of the bond is the obligation of the European Union, which will ensure that all bond payments are made in a timely manner.
• For each country programme, the Council and Commission Decisions determine the overall amount, the instalments to be paid and the maximum average maturity of the loan package. Subsequently, the Commission and the beneficiary country agree loan/funding parameters, including instalments and the payment of tranches. In addition, all but the first instalment of the loan depend on compliance with various policy conditions similar to those of IMF packages, which is another factor influencing the timing of funding.
• This implies that the timing and maturities of issuance are dependent on the related EU lending activity.
• Funding is exclusively denominated in euro.
• The maturity spectrum is 5 to 30 years.
• As a frequent benchmark borrower, the EU intends to build a liquid yield curve within the above parameters. The EU commits lead managers to provide an active secondary market, quoting two-way prices at all times; it also monitors that such commitments are applied.
• The EU issues benchmark-size bonds under its Euro 80 billion Medium Term Note programme (EMTN).

Recent funding and funding plan

• With the activation of the EFSM for Ireland and Portugal, the EU is a frequent benchmark issuer: since 2011, EUR 42 billion have been raised via 13 bonds (including for BoP), mainly in EUR 3 to 5 billion transactions:
  • 2011: EUR 29.2 billion via 7 transactions.
  • 2012: EUR 15.8 billion via 6 issuances: 
    • EUR 3 bn 30y bond in January
    • EUR 3 bn 20y bond in February,
    • EUR 1.8 bn 26y bond and EUR 2.7 bn 10y bond in April,
    • EUR 3.0 bn 15y bond on 23 October.

• Total debt outstanding: EUR 55.8 billion.
• Annual interest and principal obligations range from EUR 1.3 billion in 2012 to a maximum EUR 10 billion in 2021.
• With the EUR 3bn bond issuance of 23 October, the EU/EFSM funding programme for 2012 has been completed.
• For 2013, funding of EUR 4.7 billion is planned, completing the EFSM programme. Additional smaller amounts might be placed under the BoP and the MFA.

EU credit rating

The EU enjoys an AAA credit rating from the three major rating agencies, which reflects very strong Member State support. Member States include several of the world's largest and most developed industrial economies and together form a major bloc in the world economy.

The EU’s AAA/Aaa/AAA ratings reflect:

• Borrowings are direct and unconditional obligations of the EU and guaranteed by the 27 Member States.
• Should a beneficiary country default, the debt service will be drawn from the budget of the European Union. EU Member States are legally obliged, according to the EU Treaty, to ensure that the budget always has sufficient funds to meet the EU’s obligations. For this purpose the Commission may draw on all Member States. Thus investors are only exposed to the credit risk of the EU, not to that of the beneficiary of loans funded.
• The EU may not borrow to finance a budget deficit.
• “Back-to-back” lending ensures that the EU budget does not assume any interest rate or foreign exchange risk.

Agency	Rating	Comments
Fitch Ratings	AAA/Stable	Rating of EU based on the support it receives from its 27 Member States Highly conservative and prudential rules set up by the EU on lending and borrowing activities EU debt service relies on several layers, including coverage of EU borrowings by the EU budget and Member States' obligations to provide funds necessary to balance the budget (March 2012)
Moody's	AAA/Outlook negative	Debt issued by EU backed by multiple layers of debt-service protection  Conservative budget management, support by the 27 EU Member States  Outlook reflecting Moody's view on negative outlooks now assigned to the Aaa sovereign ratings of key contributors to the EU budget: DE, FR, UK, NL. (Sept. 2012)
Standard & Poor's	AAA/Outlook negative	EU benefits from multiple layers of debt-service protection sufficient to offset current deterioration in Member States creditworthiness Outlook reflecting in S&P's view the negative outlooks on 16 of the 27 Member States (S&P, Jan. 2012)

The conclusion is that the risk of investing in an EU bond is entirely unrelated to the credit risk of the related EU loan to a beneficiary country. The debt issued by the EU is backed by several layers of debt-service protection: the bond is fully guaranteed by the EU budget (EUR 129.1 bn in 2012) including EU own resources (where customs duties and VAT resources already contribute EUR 33.7 bn to EU income) and, ultimately, by the EU Member States, independent of the use of the funds raised with the bond.

Overview of EU issuance: 2009 - 2012

(as of 23 October 2012, for more detailed information, please click on an entry of the table)

Bond issue	Issue date	Maturity	Amount issued (EUR)	Issued at MS
EU 3,125 2014	25/02/2009 [23 KB]	03/04/2014	1.000.000.000	+30
EU 3,250 2014	26/03/2009 [23 KB]	07/11/2014	2.000.000.000	+35
EU 3,125 2015	27/07/2009 [23 KB]	27/01/2015	2.700.000.000	+25
EU 2,500 2015	12/01/2011 [24 KB]	04/12/2015	5.000.000.000	+12
EU 3,625 2016	06/07/2009 [24 KB]	06/04/2016	1.500.000.000	+40
EU 2,750 2016	01/06/2011 [20 KB]	03/06/2016	4.750.000.000	flat
EU 2,375 2017	22/09/2010 [23 KB]	22/09/2017	1.150.000.000	+8
EU 3,250 2018	24/03/2011 [24 KB]	04/04/2018	4.600.000.000	+8
EU 2,375 2018	06/10/2011 [27 KB]	04/10/2018	1.100.000.000	+15
EU 3,375 2019	10/03/2010 [23 KB]	10/05/2019	1.500.000.000	+20
EU 3,500 2021	31/05/2011 [20 KB]	04/06/2021	4.750.000.000	+14
EU 2,750 2021	21/09/2011 [61 KB]	21/09/2021	5.000.000.000	+20
EU 2,750 2022	04/05/2012 [123 KB]	04/04/2022	2.700.000.000	+56
EU 3,000 2026	29/09/2011 [23 KB]	04/09/2026	4.000.000.000	+40
EU 2.500 2027	30/10/2012 [121 KB]	04/11/2027	3.000.000.000	+36
EU 2,875 2028	03/07/2012 [135 KB]	04/04/2028	2.300.000.000	+68
EU 3,375 2032	05/03/2012 [125 KB]	04/04/2032	3.000.000.000	+78
EU 3,375 2038	24/04/2012 [124 KB]	04/04/2038	1.800.000.000	+87
EU 3,750 2042	16/01/2012 [50 KB]	04/04/2042	3.000.000.000	+125
MS = Mid Swaps