Is the EU bond rate for the Recovery Fund really a bargain for Italy?
The European Commission issued 10-year bonds worth 20 billion at a rate of 0.086%. Giuseppe Liturri's analysis
Let's get ready for the blast of trumpets and roll of drums. If good morning starts in the morning, this will be the soundtrack that will characterize Ursula Von der Leyen's European tour to present the positive evaluation of the national Recovery plans. But Von der Leyen will not arrive empty-handed. It will bring as a dowry – it will be in Rome on June 22 – the success of the first issue of the bonds that will finance the expenses envisaged by those plans.
Yesterday, the Commission issued 10-year bonds worth 20 billion at a rate of 0.086%, 32 basis points above the German bond with the same maturity. It made use of a placement consortium – which then sells the securities to investors – consisting of BNP Paribas, DZ Bank, HSBC, Intesa Sanpaolo and Morgan Stanley. The demand was about 7 times the supply.
As triumphalistically commented by Commissioner Johannes Hahn , this is the most consistent placement in the history of the EU, which finds a comparable precedent in the first issue to finance the Sure instrument, which took place on 20 October 2020, placing 17 billion (10 to 10 years and 7 to 20 years) with rates of -0.24% and 0.13% respectively.
It should be noted that, given the different market conditions, the rate increased from -0.24% to 0.09% yesterday. But the spread with respect to the equivalent German stock is essentially unchanged (37 basis points then, 32 today).
All right, then? We would say no.
- To greet triumphalistically, with hymns to the newfound European solidarity, an instrument that arrives (but some non-trivial passages are still missing) in the coffers of the EU states 14 months after the occurrence of an unprecedented recession in peacetime, appears at least risky. The times in which aid from the Trump and Biden presidencies reached the US economy are measured in weeks. Not to mention the entity which, in this case, is truly priceless from a macroeconomic point of view. In short, instead of apologizing for being late and not long, we are at Beethoven's "Hymn to Joy".
- In no time at all, the journalists rushed to make the difference and, therefore, enhance the convenience for Italy of these loans compared to the normal 10-year BTP issue. Given that even the Italian 10-year received demand equal to about 7 times the offer just a few days ago, the comparison between the 0.76% rate of the latter and the 0.09% of the EU bond, would determine the immediate expulsion from the examination session of any student of economics and finance. However, today many newspapers practice this exercise. How do you ignore:
- the de facto privilege (seniority) enjoyed by EU loans over BTPs and which was clearly stated in the loan agreement governing the Sure instrument?
- The load of conditions attached to EU loans, in three respects, which cannot fail to have a price (in fact the market assigns it):
- Compliance with country recommendations
- Compliance with the Stability and Growth Pact
- Respect for specific spending destinations, in favor of the ecological and environmental transition and numerous other constraints.
- The 0.09% rate, considered deceptively convenient, is just a gift to investors who find themselves receiving about 30/35 basis points more than the German Bund with a substantially equivalent level of risk. In fact, the system of guarantees governing these issues is so broad that, even if all Member States fail, the share from Germany's budget alone would be sufficient for annual repayments up to 2058. This is why investors flock to mass.
We did not believe that in this country it was necessary to explain things known to first-year economics students.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/e-davvero-un-affarone-per-litalia-il-tasso-del-bond-ue-per-il-recovery-fund/ on Wed, 16 Jun 2021 12:01:54 +0000.