Annexes to COM(2021)250 - New funding strategy to finance NextGenerationEU - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)250 - New funding strategy to finance NextGenerationEU. |
|---|---|
| document | COM(2021)250  |
| date | April 14, 2021 |
2.8. Effective communication and investor outreach:
Clear and open communication to investors is critical for the success of the EU borrowing operations. To that end, the Commission is developing a comprehensive investor relations strategy and a series of tools to connect with its investor base. The strategy will enhance the direct outreach to investors and will cover strategic media relations and social media presence.
Through its issuance of “social bonds” under the SURE programme, the Commission is currently establishing itself as an important issuer of Environmental, Social, and Corporate Governance (ESG) labelled bond issuances. To play this role more effectively, the Commission is overhauling its communication strategy and is well advanced in the implementation of an Investor Relations database. Use of an Investor Relations database will help the Commission to manage its relationships with important investors in a more structured way. An EU funding newsletter will also be issued, allowing the Commission to communicate to the investor community in a regular and transparent manner. The Commission will also reach out actively to important investors across the globe through a systematic programme of structured visits (“road shows”).
3. Where do we stand today?
The Commission is aiming to be ready to commence NGEU issuance once the ORD ratification process is completed. Preparations are well advanced. Four notable milestones have been achieved:
1. The underlying account structure has been configured, centred on the NGEU account at the European Central Bank with whom the Commission is at an advanced state of discussion. The payment circuits for routing NGEU proceeds through this account to the beneficiaries are being finalised.
2. The Commission is establishing the Primary Dealers Network following the adoption of the parallel Commission Decision on Primary Dealer Network. The period for expressions of interest from members of EU sovereign and supranational primary dealer groups is now open. The Commission will examine all applications and publish a first list of NGEU primary dealers towards the end of May.
3. The Commission Decision establishing the governance arrangements and risk management structures to ensure the accountability, transparency and sound financial management of these important activities has been adopted.
4. All the technical and operational preparations are being implemented to ensure smooth execution of transactions through established arrangements with public institutions for handling of funds and settlement of transactions.
4. Further steps before launch of first NGEU transactions:
Prior to the first NGEU issuance by June, the Commission will complete the following important milestones on the road towards full implementation of the NGEU issuance programme:
1. Unveil the auction platform that the Commission will rely on for both medium- and long-term bonds and EU-bills (mid May 2021).
2. Finalise the pricing and maturity policy for RRF loans. This policy will ensure parity of treatment and attractive and easy-to-manage repayment conditions for all Member States applying for loans.
3. Adopt the first framework borrowing decision and publish the first semi-annual funding plan for NGEU issuances and investor newsletter, providing a clear indication of our issuance intentions for the remainder of 2021 (early June 2021).
Upon ratification of the ORD in line with relevant constitutional requirements, which is expected before the summer, at the latest, the Commission will then be able to launch the first NGEU syndicated transaction based on our first Funding Plan.
5. Further work streams to complete and enhance the NGEU Diversified Funding Strategy:
Work will continue on implementation of the NGEU Diversified Funding Strategy after the first issuance. Over the summer, the Commission will work closely with the auction system manager so that the auction programme can be launched in September 2021. The inaugural auction for the EU Bill programme will be another major landmark event in the life of the NGEU issuance programme.
On the lending side, the Commission will also continue to invest in its capabilities. Initially, in the interest of rapid disbursement of funds, the interest rate on loans to Member States may change periodically, and to a limited extent, as some of the bonds in the pool that fund the loans mature. To offer Member States the option of replacing these initial loans by fixed rate loans, the Commission will work quickly to build the capacity to offset maturity mismatches between the loan and the underlying funding instruments. This requires building the operational capacity to hedge interest rate risk (using interest rate swaps) stemming from the maturity transformation in such an operation. The capacity to offer fixed interest rates will be in place in 2022.
During this deepening phase, additional instruments could be implemented to improve the toolbox for managing the liquidity risk and the outstanding debt.13
6. NGEU Green Bond issuance:
In line with its efforts to reorient capital flows to more sustainable uses, as outlined in the 2018 Action Plan on Financing Sustainable Growth,14 the Commission will fund 30% of the NGEU programme through green bond issuance. This could amount to up EUR 250 billion of green bond issuance, establishing the EU as one of the biggest green bond issuers globally and reinforcing the EU’s policy and market leadership in sustainable finance.
The Commission is currently designing the issuance framework for green bonds under NGEU (the “NGEU Green Bond framework”). The NGEU Green Bond framework will build on the obligation for Member States to ensure that 37% of expenditures financed by the national Recovery and Resilience Plans is dedicated to investments and reforms addressing climate
13 This could include possibility to use (1). repurchase agreements to raise money for a limited period in exchange for securities which are temporarily lent out; (2). commercial paper, which is an even more flexible instrument than T-bills and can be a useful complementary tool for small amounts. (3). the ability to run a buyback programme to manage the bond redemption profile.
14 https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en.
change. That expenditure on climate-related investments, by Member States or regional/urban authorities, will be clearly identified, based on a methodology established in the Recovery and Resilience Facility Regulation. That methodology has already been aligned as much as possible with the taxonomy. The identified expenditure will constitute the eligible expenditure for the purposes of NGEU Green Bond framework.
The NGEU Green Bond framework will be based on twice-yearly information from the Member States about the expenditures on those investments and reforms. This information will allow the Commission to provide the necessary assurances to investors that the proceeds from issuing green bonds have been used for green investments.
The NGEU Green Bond framework will be based on well-known and established market standards while aligning to the upcoming EU Green Bond Standard wherever possible.
The NGEU Green Bond framework will be published in early summer. On that basis, the first NGEU Green Bond issuance could take place already in autumn 2021.
7. Reporting to European Parliament and Council:
The NGEU funding strategy will be implemented on the basis of processes that ensure full accountability, a high level of transparency and deliver sound financial management of all NGEU financing flows. The Commission has put in place a strong governance and risk management framework, centred on the role of an independent Chief Risk Officer responsible for overseeing a strong Risk and Compliance policy to ensure the sound financial management of NGEU operations.
The implementation of NGEU will be of interest to the European Parliament and Council given the dimensions of the activities and their importance for the realisation of the economic and social objectives of the NextGenerationEU. Therefore, and as outlined in the Own Resources Decision and the Inter-Institutional Agreement15, the Commission shall regularly and comprehensively inform the European Parliament and the Council about all aspects of its debt management strategy. Annual updates on borrowing and lending activities will be provided to the European Parliament and Council, in accordance with the requirements set out in Article 5(3) of the ORD from the third quarter of 2021.
8. Conclusion:
NextGenerationEU is the key to the Union’s speedy and full recovery from this crisis. The NGEU diversified funding strategy is a critical component in its successful delivery. It will allow the Commission to operate efficiently, and mobilise on the financial markets the resources needed to power the Union’s economic recovery. Ultimately, a diversified funding strategy will allow the Commission to fund NextGenerationEU, with lower execution risk and at lower cost for the Member States and European taxpayers.
Looking beyond the immediate economic and social crisis, a successful NGEU issuance programme will also strengthen the fabric of the Economic and Monetary Union, enhance the role of the euro in international capital markets and confirm EU leadership in sustainable
15 Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources, OJ L 433I , 22.12.2020.
finance. It can strengthen the international role of the euro by deepening EU capital markets, offering global investors a new highly-rated and liquid euro-denominated asset, including a ground-breaking EU-bill programme. A high-profile and successful NGEU Green Bond issuance will assert EU leadership in building deep EU markets for sustainable finance.
For all of these reasons, a diversified funding strategy represents the right approach for financing NGEU. The Commission will be ready to commence NGEU funding operations once the legal conditions to start borrowing are finalised with the aim of issuing the first NGEU bonds by June.