Europe’s Call-to-Arms Moment May Disappoint Investors. Again

Europe’s Call-to-Arms Moment May Disappoint Investors. Again(Bloomberg) -- A video call between European Union leaders on Thursday may fall short of giving investors clarity over how the bloc will finance economic recovery efforts, risking a prolonged paralysis that has pushed borrowing costs higher across peripheral euro-area countries.EU institutions are focusing on a proposal to boost the joint budget, largely shunning demands by Italy and Spain for joint debt issuance to share the costs of cushioning a pandemic-induced recession. The plan being prepared would instead see the European Commission use its massive budget to borrow from financial markets and then channel cheap loans to the worst-hit nations, according to two diplomats briefed on the ongoing preparations.The bulk of the leverage created in the so-called recovery instrument of the new EU budget would take place over the next two years and the loans would be repaid after 2027, according to one of the diplomats, who asked not to be named as negotiations are ongoing. Even though the use of the budget is a more palatable solution to countries such as Germany and the Netherlands, the plans have so far failed to sway Southern nations, which demand more solidarity and concessions from their richer peers.Europe is entering what is projected to be the steepest recession in living memory, while the timing of recovery depends on factors largely outside the control of policymakers, such as the availability of a vaccine or an antiviral cure for the lethal coronavirus. The drop in economic output and the massive funds needed to keep businesses and households afloat has investors doubting whether highly indebted European countries can foot the bill.Bonds FallItalian bonds tumbled on Monday, with yields on 10-year notes rising by 15 basis points to 1.95%. That’s more than double the borrowing costs from mid-February, as a package of economic measures adopted so far by EU finance ministers has left loose ends to be sorted out and is seen by many economists as insufficient.One of the officials familiar with the matter said that Thursday’s video call between leaders will have to be followed by others until a concrete solution is reached. Failure to come up with a convincing plan would put more pressure on the European Central Bank to boost its bond purchases to keep spreads between German and peripheral yields widening.A French official concurred that an agreement at Thursday’s summit was unlikely, and that a few more weeks of negotiations was needed. The official also said that the size of the fund would have to be around 1 trillion euros ($1.1 trillion). The plan to be presented on Thursday by EU institutions revolves around four pillars, according to the officials briefed: mobilizing massive investment, repairing the bloc’s single market after border closures, supply chain breakdowns and export restrictions disrupted the flow of goods, global action to fight the pandemic, and better communication between Brussels and national capitals.(Updates with details from French official in seventh paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

April 21, 2020