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The EU as a borrower

The EU is empowered by the EU Treaty to adopt borrowing programmes to mobilise the financial resources necessary to fulfill its mandate.

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

The EU has sent a Request for Proposals (RfP) on 26/02/2014 to a selection of 20 banks to prepare for the execution of the EU funding plan as stated on page five of the Investor Presentation.

>> download: European Union – Investor Presentationpdf(2 MB) Choose translations of the previous link   (19 June 2014)

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 2014, 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/Aaa (outlook stable) credit rating from Fitch and Moody’s and a AA+ (outlook stable) rating from Standard & Poor’s, reflecting very strong Member State support. Member States include several of the world's largest and most developed industrial economies and together form a major economic bloc in the world economy.

The EU’s AAA/Aaa/AA+ ratings reflect:

  • Borrowings are direct and unconditional obligations of the EU and guaranteed by the 28 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/ Outlook stable

  • On 12 March 2014, Fitch re-affirmed the EU's AAA long-term rating
  • Rating of EU based on the strong political support it receives from its 28 Member States
  • Limited debt service requirements and possibility to prioritise debt service over other budget expenditures
  • Multiple sources of protection for bondholders, including coverage of EU borrowings by the EU budget, if need be direct recourse to Member States to provide funds necessary to balance the budget, to some extent preferred creditor status.

Moody's

Aaa/Outlook stable

  • On 14 March 2014, Moody's re-affirmed the EU's Aaa long-term rating and revised the outlook to stable
  • Debt issued by EU backed by multiple layers of debt-service protection
  • Conservative budget management, support by the 28 Member States.

Standard & Poor's

AA+/Outlook stable

EU benefits from multiple layers of debt-service protection:

  • Annual budget revenues total € 1,024 billion over the 2014-2020 MFF period. These revenues could be reallocated for debt service if any of the outstanding loans totaling only € 56 billion defaults
  • EU has an additional contingent claim on Member States of about € 30 billion annual over the 2014-2020 MFF period. This pledge is made for the express purpose of backing EU’s financial obligations.
  • Both this pledge and any budgetary payments referred to above are as confirmed by S&P joint and several obligations of the EU Member States.

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 135.5 bn in payment appropriations for 2014) 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)

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