Such optimism seemed exaggerated even then. A year on, as the European Commission prepares to sell bonds to finance the 800 billion euro fund, excitement has been tempered by doubts about the fund’s potential to become permanent.
Without that, according to Chris Iggo, chief investment officer for core investments at AXA Investment Managers, the issuance is destined to be “a historical anomaly and the bonds will just get tucked away in insurance company portfolios”.
“This has to be an ongoing thing, there has to be ongoing centralised borrowing capability … otherwise it becomes a one-off thing that’s not very interesting in the long run,” said Iggo, who helps manage 869 billion euros.
“They won’t trade and they won’t be liquid.”
As it stands, recovery fund borrowing will end in 2026. The debt pile will then shrink until the last bonds mature in 2058.
EU budget commissioner Johannes Hahn repeated this week that the bonds were a reaction to a one-off event. The fund was “a strong signal of solidarity” following the pandemic rather than a Hamiltonian moment, he said.
German government bonds are Europe’s fixed-income instrument of reference but at 1.5 trillion euros, the market is a fraction of the $20 trillion outstanding in U.S. Treasuries.
Some had hoped the recovery fund debt would form the basis of an issuance programme to eventually create a risk-free asset which, alongside Bunds, would eventually rival Treasuries.
EU Commission Vice President Valdis Dombrovskis did recently hint that a successful recovery fund offered scope to develop a permanent instrument. Germany’s Green Party, which is likely to join the next government, also wants to make the fund permanent.
And the EU has done the groundwork, creating a debt office and a network of primary dealers banks to manage the programme and run debt auctions. Some 90 billion euros in bonds it has sold since October to back its SURE employment scheme already trade more like sovereign securities, enjoying robust liquidity.
But wealthier EU states are likely to oppose any bid to make the fund permanent, and even the current borrowing plan took national parliaments six months to approve.
A more immediate risk is lower-than-anticipated issuance volumes, with banks predicting as little as around 600 billion euros — 25% below the top amount.
That’s because governments show little interest in taking loans from the fund, which is set up to make grants as well as to lend. Of larger member states, only Italy so far has plans to use the 386 billion euro loan facility, according to Rabobank, although demand is likely to increase with time.