18 months after the first emissions of NextGenEU debt, the market does not consider European Debt as a safe asset. Today @GBonfantiEcon and I have a piece in Bruegel where we set up the puzzle.
A thread- one figure per fact
1/6
https://www.bruegel.org/blog-post/do-financial-markets-consider-european-common-debt-safe-asset
🐦🔗: https://n.respublicae.eu/lugaricano/status/1600935891790598144
Fact 1: EU is set to become a huge sovereign issuer. The combined stock of debt obligations linked to the EU broadly considered, that is also including the EFSF, EIB and ESM, will be comparable by end of the decade to the stock of German government debt (at €1.7 tn).
2/6
🐦🔗: https://n.respublicae.eu/lugaricano/status/1600935895036989442
Fact 2: European debt is formed by a highly heterogenous set of issuances with different guarantees. However, all issues are treated similarly by the market despite this heterogeniety.
3/6
🐦🔗: https://n.respublicae.eu/lugaricano/status/1600935898815729664
Fact 3: Yields do not reflect the joint guarantees. Despite the strong legal assurances of repayment to bondholders, the current location of the yield curve of EU bonds relative to member countries' debt is worrying. For some tenors, more risky than Spain's debt!
4/6
🐦🔗: https://n.respublicae.eu/lugaricano/status/1600935902334763008
Why? Preliminary evidence suggests:
- Significant role for the ECB in determining the market nature of these instruments;
-Financial markets remain skeptical about level of commitment to EU integration—markets do not believe the joint and several liability
6/6
🐦🔗: https://n.respublicae.eu/lugaricano/status/1600935908576227329
Luis.
In emphasizing the ECB here, you overlook the more direct link of these spreads to the headroom in the EU Budget on which some of the bond guarantees rest.
The connection to 2022 is the invasion of Ukraine and the resetting of “norms” on fiscal spending and on the contribution of the EU budget to those expanded (war-related) norms may reduce (significantly?) the backing for at least some of these bonds.
Do you have numbers on headroom and expected headroom ?
Fact 4. In the past, 10-year yield spread to Germany remained constant. But starting with the end of the announcement of Asset Purchases by the ECB at the end of 2021 the yields increased at a much faster pace than those of the member countries.
5/6
🐦🔗: https://n.respublicae.eu/lugaricano/status/1600935906126725120