LONDON, Dec 19 – European Union leaders decided to borrow joint capital-market funds valued at up to €90 billion to fund an interest-free loan to Ukraine over two years, without a controversial proposal to collateralize the loan with approximately frozen Russian sovereign assets worth around € 210 billion.
Investors and analysts responded positively to the move to market funding, which they said makes the EU more credible as a collective issuer and avoids legal and reputational risks associated with freezing of foreign reserves.
Within the agreement, the funds will be advanced to Kyiv to finance defense expenditure and budgetary requirements up to 2026/27. Although the issuance of joint debt will increase the borrowing base of the bloc, which already has more than €700 billion of common debt in the form of pandemic-related instruments, the news has been generally received with indifference in the market.
Market Reaction:
The yield on euro-area bonds increased slightly as the investors digested the intended supply increment.
The euro was stable against the dominant currencies, indicating that there was confidence in the bloc collective financing plan.
Investor Views:
The deal was the much-needed pragmatic compromise among analysts. Carsten Brzeski, the global macro head at ING, emphasized that the solution brings about the notion that, although the solution is not a Eurobond, the EU is becoming more and more like a permanent shared-debt structure.
There were risks as observed by some investors: the further increase in supply of sovereigns would strain the market, which was already grappling with the heavy supply by Germany and other sovereign debt issuers.
Political Backdrop:
The loan package was the result of years of summit negotiations and the failure of a proposal to finance Kyiv through the frozen Russian assets held primarily in Belgium. That plan was later sunk by legal doubts and resistance of some member states such as Belgium, Italy and others.
President Volodymyr Zelenskyy of Ukraine was pleased by the financial guarantee as it was a sign of strength, although the bloc was not in agreement on the use of Russian assets.
It was supported by 24 out of the 27 members of the EU with Hungary, Slovakia and Czech Republic not participating in the joint borrowing mechanism.
Outlook:
The loan will be essential in nearly short-term financing of war-time spending of Ukraine, though questions exist about long-term fiscal sustainability and whether the EU will re-examine the application of frozen assets or other reparation tools as a component of any future settlement with Russia.
