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On April 9, 2020, after intense and lengthy discussions, the EU finance ministers reached a comprehensive economic policy response to the COVID-19 pandemic1. The President of the Eurogroup, Mario Centeno, stated: "Today, we agreed upon three safety nets and a plan for the recovery, to ensure we grow together, not apart, once the virus is behind us. These proposals build on our collective financial strength and European solidarity."
The dilemma dividing EU Member States was whether Eurobonds or ESM financial assistance should form the response to the COVID-19 crisis. After the 16-hour-long Euro Summit of April 7, the EU finance ministers reached a compromise on the issue; an emergency package of €540 billion will be made available immediately to stimulate the EU economy. France's Bruno La Maire stated that it was an "excellent accord" between the European finance ministers, while Germany's Olaf Scholz praised the decision as a "great day of European solidarity"2. The agreement strongly builds on the ESM. However, given the ESM's limited lending capacity, the discussion about Eurobonds is likely to go on.
The Initial Dilemma: ESM Instruments or Eurobonds?
The Eurogroup finance ministers previously failed to reach an agreement on April 73, a fortnight after the European Council invited the Eurogroup to propose an economic response to the COVID-19 crisis4. During the two weeks leading to the Euro Summit, two prevailing positions emerged as to the appropriate measures:
(i) "Eurobonds" or "corona bonds" as a form of long-term common debt instrument that would effectively mutualize Eurozone debt;5 and
(ii) the European Stability Mechanism (ESM), the EU bailout fund that already permits Eurozone countries to borrow capital on similarly favourable conditions.6
The Eurobond Proposal
On March 25, France, Italy and Spain and six other EU Member States7 called for a common debt instrument that should be of sufficient size and long maturity to be able to ensure long-term financing of necessary investments in the healthcare system and temporary policies to protect the economies and social models of all Member States.8 The proposal reiterated the idea of the so called "stability bonds" as a means of pooling of sovereign issuance among the Member States while sharing associated revenue flows and debt servicing costs.
The idea was first raised by the European Commission at the height of the sovereign debt crisis in 2011. The Commission's Green Paper assessed the feasibility of common issuance of sovereign bonds among the Member States of the euro area and the required conditions.9 To date, this is the only relevant source on the possible approaches for the common issuance of Eurobonds.
These options can be generally categorized into three broad approaches, based on the degree of substitution of national issuance (full or partial) and the nature of the underlying guarantee (joint and several or merely several) implied. The three broad approaches are:
(i) Full substitution of national issuance with Eurobonds, with joint and several guarantees. This approach presupposes the creation of a single euro area debt agency that would issue Eurobonds in the market and distribute the proceeds to Member States based on their respective financing needs. They would be issued under joint and several guarantees provided by all euro area Member States, implying a pooling of their credit risk. This would most likely lead to the credit rating of the larger euro area Member States to dominate in determining the bond rating, suggesting that such Eurobonds issued could be expected to have a high credit rating;10
(ii) Partial substitution of national issuance with Eurobonds, with joint and several guarantees. Eurobond issuance would be underpinned by joint and several guarantees but would replace only a limited portion of national issuance. The portion of issuance not in Eurobonds would remain under respective national guarantees. The issuance of Eurobonds would occur only up to certain predefined limits and thereby not necessarily covering the full refinancing needs of all Member States. They would benefit from a joint and several guarantee and would imply a uniform refinancing rate for all Member States;11 and
(iii) Partial substitution of national issuance with Eurobonds, with several but not joint guarantees. Under this approach, Eurobonds would again substitute only partially for national issuance and would be underpinned by pro rata guarantees of euro area Member States. The third approach differs from the second insofar as Member States would retain liability for their respective share of Eurobond issuance as well as for their national issuance.12
The same group of countries that opposed sovereign bonds in 2011 are now opposing the issuance of Eurobonds and on similar grounds.13 The key questions that yet remain to be answered are indicatively:
- How would the size of the Eurobond be determined?
- How would the money raised be allocated among countries facing different needs and different costs?
- Who would make the decision? What criteria would be used for the decisions? and
- How would the Eurobond be serviced?14
The last Euro Summit of April 9 marked no progress as to clarifying the role of Eurobonds in the current crisis, except for providing that Member States will consider "innovative financial instruments, consistent with EU Treaties"15 as one of the possible funding sources for the future Recovery Fund that will be established to support the post-crisis economic recovery.
ESM Precautionary Financial Assistance: PCCL & ECCL
While the aforesaid nine Member States are in favor of the Eurobonds, Germany, Finland, Austria and the Netherlands prefer the use of the existing EU instruments, notably the ESM toolkit. The argument is founded inter alia on the fact that a prompt response is needed; the ESM is already available to respond with an unused lending capacity of €410 billion.
Pursuant to Article 3 of the ESM Treaty16, the ESM's mission is to provide financial assistance to euro area countries experiencing or threatened by severe financing problems. This assistance is granted only if it is proven necessary to safeguard the financial stability of the euro area as a whole and of ESM Members. To this end, the ESM shall be entitled to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial institutions or other third parties.
As per Article 12.1 of the ESM Treaty, the provision of stability support to an ESM Member State is "subject to strict conditionality, appropriate to the financial assistance instrument chosen." In this line, Article 14.1 states that the ESM Board of Governors "may decide to grant precautionary financial assistance in the form of a precautionary conditioned credit line or in the form of an enhanced conditions credit line in accordance with Article 12(1)." The conditionality attached to the ESM precautionary financial assistance shall be detailed in the MoU, in accordance with Articles 14.2 and 13.3 of the ESM Treaty. The financial terms and conditions of the ESM precautionary financial assistance shall be specified in a precautionary financial assistance facility agreement (Article 14.3 of the ESM Treaty).
Both instruments of precautionary financial assistance, i.e, the Precautionary Conditioned Credit Line (PCCL) and the Enhanced Conditions Credit Line (ECCL), can be drawn via a loan or a primary market purchase, have an initial availability period of one year and are renewable twice, each time for six months17. When an ECCL is granted or a PCCL drawn, the ESM Member is subject to enhanced surveillance by the European Commission. Surveillance covers the country's financial condition and its financial system. It shall be noted that among the lending tools that can be offered by the ESM, the precautionary credit line has never been used before.
Precautionary Conditioned Credit Line (PCCL)
A PCCL is available to a euro area Member State whose economic and financial situation is fundamentally sound, as determined by a number of eligibility criteria, such as public debt, external position or market access on reasonable terms. An MoU specifying policy conditionality is required.
Enhanced Conditions Credit Line (ECCL)
Access to ECCL is open to euro area Member States whose economic and financial situation remains sound but that do not comply with the eligibility criteria for PCCL. The ESM Member is obliged to adopt corrective measures addressing such weaknesses and avoiding future problems in respect of access to market financing. The ESM Member has the flexibility to request funds at any time during the availability period. The policy conditions for an ECCL are wider ranging. In addition, when an ECCL is approved, the beneficiary ESM Member faces enhanced surveillance.
It shall also be noted that the ECCL may activate ECB's Outright Monetary Transactions (OMTs), which are conditioned upon an appropriate ESM facility programme; such programme can take the form of a full ESM programme or an ECCL precautionary programme18. According to ESM Managing Director, Klaus Regling, it is up to the ECB to decide whether OMT is to be activated19.
The key features and differences between the two proposals can be summarized as follows:
|ESM PCCL & ECCL||EUROBOND|
ESM precautionary credit lines are designed to maintain access to market financing for ESM Members whose economic conditions are still sound but may come under stress.
Both credit lines can be drawn via a loan or a primary market purchase.
|Eurobond or the so-called (Corona bond) was proposed to be established by nine EU Member States as a common European debt instrument against the economic threat posed by COVID-19.|
|Time of availability||
Already regulated instruments.
Both PCCL and ECCL have an initial availability period of one year and are renewable twice, each time for six months.
|Not readily available instrument. The process of designing and ratifying may require several months/years.|
|Issuer||ESM||Euro area institution/EU agency|
MoU re. policy conditionality & facility agreement;
|Interest rate||Low interest rates||Low interest rates|
|Guarantee||ESM support could be leveraged at national and/or European level.
[Additionally: EIB's initiative for an EU Member States €25 billion guarantee fund for the mobilization of up to €200 billion21 ]
|Joint and several guarantees or several—but not joint—guarantees (AAA credit quality to be required)|
|Maturity||No decision has been made yet. Maturities can be adapted to current needs22.||Undetermined|
The Eurogroup of April 9, 2020: The Three-Pillar Safety Net
The Pandemic Crisis Support
Given the serious economic consequences of the pandemic, the ESM instruments are to be used, in the manner adapted to the particularities of the symmetric shock caused by COVID-19. In this line, the Eurogroup proposed to establish a Pandemic Crisis Support, based on the existing ECCL precautionary credit line, adjusted to meet the current needs and to safeguard the euro area financial stability. In particular:
(i) Conditions: The support will be available to all euro area Member States, under standardized terms agreed in advance by the ESM Governing Bodies, reflecting the current challenges, and on the basis of up-front assessments by the European institutions.
The mere requirement to access the credit line will be that euro area Member States requesting support would commit to using this credit line to support domestic financing of direct and indirect healthcare, cure and prevention-related costs due to the COVID-19 crisis. The provisions of the ESM Treaty will be followed23.
(ii) Benchmark: Access granted will be 2 per cent. of the respective Member's GDP as of end 2019, as a benchmark.
(iii) Time of availability: The instrument is expected to be available within two weeks, and will remain available until the COVID-19 crisis is over. National procedures and constitutional formalities shall be respected.
(iv) Surveillance framework: After the provision of the support, euro area Member States shall remain committed to strengthening economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks, including any flexibility applied by the competent EU institutions.
It shall be noted that the Balance of Payments Facility can provide financial support to Member States that have not adopted the euro24. It should be applied in a way which duly takes into account the special circumstances of the current crisis.
The Pan European Guarantee Fund
The EIB Group will proceed to the establishment of a pan-European guarantee fund of €25 billion, which could support €200 billion of financing for companies with a focus on SMEs, throughout the EU, including through national promotional banks. To this end, EIB is urged to operationalize its proposal as soon as possible and stand ready to put it in place without delay, while ensuring complementarity with other EU initiatives and the future Invest EU programme.
In the spirit of solidarity and in line with Article 122 of the TFEU, a temporary loan-based instrument will be established as soon as possible—Support to mitigate Unemployment Risks in an Emergency (SURE). The instrument shall primarily support the efforts to protect workers and jobs, while respecting the national competences in the field of social security systems, and some health-related measures. In this context, the Commission's proposal of April 2 to set up a temporary instrument supporting Member States to protect employment in the specific emergency circumstances of the COVID-19 crisis was accepted. Under this scheme, financial assistance will be provided, in the form of loans granted on favourable terms from the EU to Member States, of up to €100 billion in total, building on the EU budget as much as possible, while ensuring sufficient capacity for Balance of Payments support, and on guarantees provided by Member States to the EU budget. The access to the instrument will be discontinued once the COVID-19 emergency has passed.
1 Report on the comprehensive economic policy response to the COVID-19 pandemic, Press release, published on April 9, 2020.
2 EU ministers make breakthrough on coronavirus economic response, Deutsche Welle, published on April 9, 2020.
3 Eurogroup fails to land deal on coronavirus economic response, Financial Times, April 8, 2020.
4 Joint statement of the Members of the European Council, European Council, March 25, 2020.
5 Coronavirus: EU must mobilise all its resources to help member states, The Irish Times, April 6, 2020.
6 A response to the corona crisis in Europe based on solidarity, Auswärtiges Amt, April 5, 2020.
7 Joint letter of the Heads of State or Government of Belgium, France, Greece, Ireland, Italy, Luxembourg, Portugal, Slovenia and Spain, dated 25.03.2020, Post-European Council Briefing, March 26, 2020.
8 Nine member states ask for Eurobonds to face coronavirus crisis, Euractiv, March 25, 2020.
9 Green Paper on the feasibility of introducing Stability Bonds, European Commission, November 23, 2011.
10 ibid. p. 12.
11 ibid. p. 14-15.
12 ibid. p. 18-19.
13 Austria, Germany, and the Netherlands remain among the most strident opponents of Eurobonds. Eurogroup fails to land deal on coronavirus economic response, Financial Times, April 8, 2020.
14 Eurobond: a good idea but the devil is in the detail, Financial Times, March 25, 2020.
15 Report on the comprehensive economic policy response to the COVID-19 pandemic, press release, published on April 9, 2020.
16 Treaty Establishing the ESM, signed on 2 February 2012 (Consolidated version)
17 ESM Guideline on Precautionary Financial Assistance
18 Technical features of Outright Monetary Transactions, ECB press release, published on September 6, 2012.
19 ESM Managing Director Klaus Regling's Financial Times interview conducted on March 30, published on March 31, 2020, available at: https://www.esm.europa.eu/interviews/transcript-klaus-reglings-interview-financial-times.
20 ESM Managing Director Klaus Regling's Financial Times interview conducted on March 30, published on March 31, 2020, available at: https://www.esm.europa.eu/interviews/transcript-klaus-reglings-interview-financial-times.
"The conditions under which they could be made available would be completely different from 10 years ago because this is a different crisis. Conditions could be, for instance, to earmark the money, if it's made available, for expenditures in the health sector, for financing the measures needed to counter the economic consequences of the corona crisis."
21 Coronavirus outbreak: EIB Group's response to the pandemic, April 3, 2020.
22 ESM Managing Director Klaus Regling's Financial Times interview conducted on March 30, published on March 31, 2020, available at: https://www.esm.europa.eu/interviews/transcript-klaus-reglings-interview-financial-times.
23 Report on the comprehensive economic policy response to the COVID-19 pandemic, press release, published on April 9, 2020.
Reetu Vishwakarma (White & Case,Transaction Lawyer, Frankfurt) contributed to the development of this publication.
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