Speech by Stephanie RISO at the 5th Annual Capital Markets Seminar

Ladies and Gentlemen,

There are many reasons why I am delighted to be here with you today.

For one thing, this is my first opportunity to speak at the Capital Markets Seminar.

This seminar embodies the EU’s

ambition to leverage capital markets for the benefit of all,

in a ‘Team Europe’ spirit that has characterised our 3 institutions throughout the crises of the past years.

It is a great opportunity to meet many of you who have supported us in this endeavour.

Since it is my first time in this seminar, allow me to introduce myself briefly.

I am the new Director General for Budget in the European Commission.

And in this role, I oversee the Commission’s borrowing and lending operations.

I say ‘new’ because it was only 3 months ago that I took up this role.

But I am not new to the European Commission where I have been working for more  

than two decades.

Mainly on economic, financial and budgetary issues.

I was involved in the development of our first financing tools at the time of the great financial crisis: the EFSF, the ESM.

And in my last position before I took up my current role, as Deputy Head of Cabinet in the cabinet of President Von der Leyen in charge of the economic and budgetary issues,  

I worked very closely with the Directorate General for budget and Gert-Jan Koopman from the establishment of NextGenerationEU, to the latest Macro-Financial Assistance programmes we designed for Ukraine last year.  

So, while I am ‘new’ in my current role, I am not new to these issues.

In fact I have been proudly part of the transformational developments the EU budgetary policy underwent in recent years.

And of the emergence of EU issuances as a tool supporting EU priorities alongside the EU budget.

It is easy to forget that only three years ago, the EU was a marginal player in euro Debt Capital Markets.

When it is now an important actor.

‘Transformational’ is not a word I use lightly.

Whereas in 2019, the EU issued only 400 million euros in long-term funding,

in 2022 the EU issued 120 billion euros.

This makes the EU the fifth largest issuer in gross terms, behind Germany, France, Italy and Spain.

Since the end of 2019, the level of EU debt outstanding has increased 8-fold from roughly 50 billion euros to over 400 billion euros today.

From the start, we built the infrastructure to implement a sovereign-style funding strategy.

From clear communication to markets on our funding plans,

through the use of diverse funding techniques, like auctions and syndications,

to diverse funding instruments, such as EU-Bonds, EU-Bills and NGEU Green Bonds.

Throughout this transformation, we always remained aware that we will need to continue to improve.

A lot has been done, but there is lots more to do.

There is no finish-line in our business development.

Borrowing at our scale requires ongoing assessment and adaption to market realities and market risks.

In this context, I would like to focus on two crucial aspects of our issuance programme that market commentators have paid particularly close attention to in recent months.

The first point has to do with the budgetary safeguards underpinning EU issuances.

Let me restate here that the EU issuance takes place within the cast-iron legal and financial commitments to the Union budget made by Member States.

This is the ultimate reassurance for investors: all interest and principal repayments will always be made fully and on time.

The solidity of these protections is adequately reflected in the EU’s triple A credit rating from major ratings agencies like Fitch, Moody’s, Scope and Morningstar DBRS.

These strong budgetary underpinnings mean that the EU is equipped to respond to development in the EU’s borrowing costs.

Including when borrowing costs increase as we experimented over the last year.

The increase in the EU funding cost over the course of a year from +/- 0% to around 3% on our 10 year bonds results from market developments.

These developments have affected all issuers.

We are no exception.

These developments translate into a higher interest rate bill that the Union budget will pay in 2024 and beyond.

This will be part of the Commission’s proposal for a Draft Budget for 2024 that we will make tomorrow.

And beyond, part of the Commission Mid-Term Review of the EU long-term budget - the Multi-annual Financial Framework – that we will present on 20 June.

These proposals will include budgetary techniques options to cover the payment of these additional interest costs expenditure.

We will be engaging in discussions with Member States and the European Parliament on these proposals.

But whatever the option retained, investors in EU bonds will be repaid.

EU borrowing is a direct and unconditional obligation of the EU.

The second point I would like to address is how to make EU bonds trade and price like liquid sovereigns.

This may sound a bit esoteric/academic – but it has clear budgetary and operational impacts.

These impacts were extensively discussed in the workshop on 22/05 organised by the Budget Committee of the European Parliament.

The workshop probed deeply into the question of why EU bond yields have increased relative to sovereign yields over the past year.

Earlier, I talked about the recent transformation of the EU’s presence in capital markets.

How after 40 years small and irregular issuances, the EU developed a borrowing infrastructure capable of issuing sovereign-like quantities of debt.

And as said, we know that the work is not over.

That the onus is on us to develop our funding approach in line with the ‘state-of-the-art’.

In December 2022, we announced a series of new measures to further develop the eco-system for EU-Bonds,

with one goal: enhancing the “sovereign look-and-feel” of EU bond issuance.

The immediate focus is to further boost the secondary market liquidity of EU debt. 

The first step was taken with the Unified Funding Approach launched in January 2023.

Since then, the EU no longer issues separately labelled bonds for separate programmes: SURE, NGEU, MFA loans, etc.

Instead, there is now a single EU-Bond label that covers all EU-issuances.

The new approach will make EU outstanding debt more homogenous, and thus facilitates trading of EU bonds on secondary markets.

It will simplify our funding plans, hence increasing transparency to the market about expected funding volumes.

Beyond, we are also working to introduce two additional measures to support the secondary market liquidity of EU bonds:

• We are working with our Primary Dealers to provide investors with pricing quotes for EU securities on electronic trading platforms used by financial professionals.

Our goal is to introduce this mechanims in the second half of 2023.

• Also, we will introduce a repo facility in the first half of 2024.

We are confident that these measures will further improve the secondary market liquidity of EU-Bonds.

However, recent increases in interest rates have made it clear that the EU faces an additional challenge.

Over the past 15 months, rates on EU bonds have increased more than rates of comparable sovereign issuers.

This, despite the fact that the EU benefits from a strong credit rating,

solid market presence,

and sovereign-style infrastructure.

Our analysis is that 90% of the recent divergence between our yields and the Bund stems from the fact that the EU is classified as a conventional SSA issuer by financial market actors.

This analysis is also shared by researchers in the ECB and Bruegel as discussed in the EP workshop.

A significant part of this wedge has been driven by the convention that, as an SSA issuer, the EU is priced against the swap rates.

Another market convention is the exclusion of EU bonds from EGB indices:

This depresses demand for our bonds by benchmarked investors.

And we can legitimately ask ourselves whether indices that disregard the 4^th/5^th biggest issuer is representative of the markets.

To help us with this issue, we are launching tomorrow an investor survey on the topic to gather views from our investor base.

We are also engaging with index providers on this complex subject.

This brings us to the questions our panellists will be debating:

What conditions would institutions like the Commission or KFW have to meet before they could be priced off their own curves?

How many of these conditions do they themselves have control over?

For our part, we will continue to build an EU-Bonds ecosystem that enables the market to develop and adapt to the growing role of EU issuances. 

However, this a journey that we cannot take alone,

so I thank you, the investors and the wider market community, for all of your past, present and future support.

I now leave you in the very capable hands of Niall to kick-start the panel discussion.

I look forward to meeting you all again in the near future.

Thank you very much for listening.