Published on 25 November 2020

There is ongoing dispute about the next EU budget of which the COVID-19 recovery package (“Next Generation EU” or “NGEU”) is a part, on the basis that the money should or should not be tied to adherence to EU diktats in other areas.

A focus on this area is convenient for the EU as a distraction from major issues around the quality of the EU’s debts. The EU intends to issue €750bn of bonds to finance NGEU and it is critical that no question mark be put against the creditworthiness of these bonds, either by the capital markets themselves or by the public credit rating agencies, upon whose every word the capital markets hang.

The recent EU bond issue to fund the SURE unemployment scheme did the trick wonderfully for this purpose: it attracted €233 billion of demand, because the bonds are jointly and severally guaranteed by all the EU member states or, put more simply, Germany backstops all of them.

This guarantee sits paramount in the capital markets’ perception of EU bonds, but it is only one of the lines of investor protection that is featured in the EU’s regular roadshows, and in the rating agencies’ reports which mirror the roadshows and which are refreshed on at least an annual basis.

The NGEU bonds will lack several of the historic lines of investor protection. It is surprising that the credit rating agencies have not drawn attention to this, not least because on 11th September 2020 they received a paper laying out the shortfalls.

Here is a link to the letter to credit rating agencies (S&P, Moods, Fitch and DBRS) of 11th September 2020