Hello, and welcome to the first podcast of the Year from OMFIF sovereign debt Institute. I'm Burhan Khadbai, Head of Content of the sovereign debt Institute. And I'm delighted to be joined by Siegfried Ruhl, horse class advisor to the Director General for budget at the European Commission. During this podcast, we're talking about the EU's first indication of the year, the EU's issuance plans for 2024 and the developments of the EU as part of its evolution towards a sovereign status borrower in the bond markets. Firstly, thank you, Siegfried, for joining me. Before we go into talking about the recent syndication by the EU, I just like to get your thoughts on the current market conditions for public sector borrowers as we're recording this, on the second of February, we've just passed a record January in terms of volume of supply in the bond markets. How does this current market at the start of the year compared to your previous years as a funding official? Yeah,

Yeah, you're absolutely right. January was, indeed an impressive month with also supply we saw around 260 billion of Supply here in the first month of the year. And it was very impressive how the market was able to absorb it in the SSA market as well as in the EGB. Market. And and also it was absorbed across the full curve. What's the reason for that while some bankers would say supply creates demand. But I think the reason is that a good combination of macro factors and technical aspects delivered the basis for that end of last year, investors stepped back relatively early. And this may have accumulated some investment needs. moderate inflation numbers fueled the expectations of rate cuts, the market rallied in the last quarter and the curve normalized. And all this supported the investment appetite at the beginning of the new year, new year. So in addition, the high supply didn't really surprise the market. Investors were prepared. And all this together delivered the basis for for this very strong month in the in the primary market, and also demonstrates how deep and strong the European capital market is. Yes.

And moving on to the EU's recent syndication, I guess all those factors help that transaction, I think it was the the largest order book we've seen from sa market this year with 180 billion order book. And that must have been quite close to the record for the EU as well. Was that surprising, particularly I guess, as we look at a time when you know, QE has stopped and those previous order books from the EU were at time when you know, QE QE was at its peak. And now obviously, the ECB is beginning to wind down its portfolio as well. We

saw the market is in good shape. And we are always confident about our transactions. We know we have a large and reliable investor base. So when we, when we opened the books for this transaction, we already felt very comfortable with it. Of course, record is always has always an element of surprise. And we didn't we expected a strong order book, but we didn't expect to such a strong order book. But finally, with this dual tranche, we were able to attract a wide range of investors by issuing in the seven year end to 30 year segment. Both maturities were well received by the market. Maybe also due to the scarcity of peer supply in the relevant buckets. There was limited or no supply here in the seventh year. And in the third year. segment. So far. With this transaction, we in combination with the with the auction earlier in January, we issued already 12 point 6 billion of EU bonds under our unified funding program, out of the 75 billion we have announced for the first half of this year. So it was a strong start also for us and gives us confidence that we will be able to have a good funding semester.

Yes, thank you. And you mentioned the the first house funding needs of 75 billion for the EU. Could you sort of give us a picture of how many syndications that will equate to and forecast if you do have one for for the second half is

while the 75 billion we announced, will be raised via seven auctions and six syndications. With the announcement of the funding plan we also announced here the dates for these auctions. In syndications as part of our transparent communication, it's our objective to moderately develop our auctions further in line with the development of our market and its capacity to absorb the auction supply. We also announced that we will continue to issue in green bonds in line with the development of the eligible expenditures we receive. And we get reported from from our member states regarding the green bond program. We also want to show our strong commitment to this market segment by launching a new long dated green bond, in addition to types of our existing bonds. So we will continue with our funding strategy to be present on all parts of the curve to provide regularly supply on the different maturity buckets to support the secondary market liquidity and to issue new bonds or new points of the curve as well as further tapping existing bonds to support here their liquidity and to bring them to large benchmark sizes in the area of up to 20 billion euros.

Will this be the biggest year for EU issuance?

Well, we announced semi annual funding plans and we will announce in June our plans for the second half of the year. What we can say about the medium to long term future is that after the amendment of the RRPs that recovery and resilience plans of our member states, which also caused a reduced issuance volume in the second half of 23. We now know the final size for next generation EU. In the revised plans, our member states requested additional loans under the repower EU policy to finance the energy transition. Now 13 member states are requesting around 290 billion of loans. Together with grants this means finally, size for next generation EU of 720 billion or around 90% of the envelope of next generation EU will be used. In addition, Member States approved yesterday a 50 billion facility to further support Ukraine in the period of 2024 to 2027. Out of this 50,000,000,030 3 billion will be funded via the capital markets altogether. And with some rollover needs, which will kick in in 2025. We have to fund around 500 billion until end of 2026. How are these 500 billion will be distributed will be announced on a semi annual basis? As you know, was it from us from the past? Of course, in these funding plans, we take into account the market accepts absorption capital capacity during different periods of the year.

Yes, and as we know, all the EU bonds are now issued under a unified format under EU bonds for all of its various programs. And when we talk about EU issuance, we're not talking about the redemptions as well, when other first redemption is due for the for the shore and NGO bonds, because that will also also increase the amount you then issue in the bond markets. We

have to roll over the first bond in 2025, a three year bond which was issued in in 2022. Okay,

thank you, Siegfried. And now moving on to the other developments of the EU, particularly its evolution towards a sovereign status borrower. It does seem to be a crucial year for for the EU and in this evolution. Firstly, you recently launched the EU issuing service which allows the settlement of EU bonds to take place in the target to system which is the case for EU sovereign bonds. Could you talk a bit about that development and how that will help your issuance and EU bonds.

The launch of the new issuance servers in January the first six month bill issued under the EO issuance service or called EIS was indeed another milestone in our work and in our process to develop to a sovereign like issuer with with the EU issuance service, we are here reaching settlement infrastructure for our issuances, which is comparable to the ones of the large European sovereigns means we are issuing via CST we are settling in central bank money which reduces the settlement risk and for us and our bonds are immediately eligible in T to s so also immediately eligible as collateral for transfer auctions with the central banks in addition to special construction of the EU issuance service, where we use the National Bank of Belgium and BBSs as our CSD, but the bonds are only in a first step booked on on securities accounts of other CSDs and ICS DS, we reach a level playing field with no geographical bias. So there is no advantage or disadvantage for any bank or investor in Europe to be directly connected to the CSD or indirectly via other CSDs. So level playing field from a geographical basis and also same for the different ICs, ds and CSDs. They have the similar access to the bonds.

Thank you. Yeah, there are also plans underway for launching a repo facility this year, how is that going and when is this expected to launch.

The repo facility will be the next big step in this development with sovereign like issuer. While our cash market is well developed, and received another significant improvement with quoting obligations we launched in November last year together with our primary dealers, the repo market and this is also feedback we take from our investor survey last year, and needs to be further developed. Our plan is to be ready with our repo facility, which will allow us to participate actively here in the repo market by summer this year. In the first step, we will act as a backstop for our primary dealers so that they can cover potential short positions in EU bonds via the issuer. And this should contribute to an increase liquidity and tighter bid offer spreads in the repo market for EU bonds. At the same time, we are encouraging on an on an ongoing basis in our Investor Relations work market participants also to use these bonds as a collateral in their transactions to include them in triparty repo baskets. Many of these baskets were set up some time ago, when the EU was still a small issuer in the SSA market. And so they were not considered the EU bonds were not considered as collateral for triparty repo baskets. The nature of the EU, as an issuer has changed now, but this needs also to be reflected then, in such tri party agreements. The same for other collateral agreements. Finally, including EU bonds in these agreements is to the benefit of all parties. The EU wants are currently the cheapest, highly rated triple A rated and very liquid acid which is eligible in the market. So also the parties agreeing here on repo agreements will benefit from from the use of EU bonds as collateral.

Yes, you mentioned there the quoting commitments that EU launched at the end of last year, which is another important development support that you use secondary market liquidity and just to sort of make it clear these are not obligations. I think these are voluntary rather than an obligation for your primary dealers where they get points for internal rankings, which then increases their eligibility to lead syndication mandates. How has that process been going on with your with your dealers? Have you noticed an improvement in your in your secondary market liquidity from the from the quoting commitments.

The start of the quoting system on electronic platforms currently Brokercheck and MTS approved platforms exceeded our expectations with around 20 billion turnover in November, which dropped in December to a bit above 10 billion. Not a surprise as December is a less active month with also less trading days and recovered quickly now to January with an amount of 20 to 23 billion traded here on these two platforms in January. These amounts are very strong and and show that the market is taking this very positively. This is also in line with the feedback we receive from the market. I was last week on roadshow having several meetings with large investors. And they are all very happy about the voting system on MTS as it improves the pricing quality on screens, the transparency on your bond prices, and finally, it improves the secondary market liquidity. You're right It's not mandatory for our primary dealers to be part of the primary dealer group. However, they are rewarded in our ranking system. And it's mandatory to be eligible as a lead manager for syndicated transactions. Following the general concept of our primary dealer network, we leave it up to the banks, which role they want to play. And they decide in how far they want to be active here in this quoting facility, and therefore, then eligible for lead mandates are not.

Okay, thank you. And there also is an expectation that the EU will be moving towards creating a futures market this year, which is also a very important step in the in the evolution towards a sovereign status. Could you shed some light on that is that the plan to have the to have a futures market set up this year? And I guess has liquidity reached a point where it does sort of, you know, the future market would make sense now for the EU?

Well, a future market is not created by the issuer. The future is launched by derivatives exchange, and traded by market participants. Since the early days of our large funding program, a future is discussed. And the discussion over the last weeks, maybe became a bit more intense. For us. The question is, is there a market in addition to the existing futures we have, and this is the pre requirements before an access, launching a successful future because it's important that the future is after launch, also traded, our market has grown rapidly and will continue to grow. With the numbers I announced. Earlier I mentioned earlier here in this chat, we will reach an outstanding debt of 1 trillion by the end of 2026. Afterwards, we will stay in the market as an important issue with rollover needs in the area of 40 to 50 billion for the upcoming years after 2026 plus whatever is politically resided on additional joint financing on a European level, due to the unified funding approach such potential additional decisions for joint financing will increase the issuance of EU bonds. This is what we can give to the market as an information as a perspective. And based on that market participants the exchanges have to decide if they see here a market for the future.

Okay, thank you. And now I wanted to ask you about how your investor base has changed and evolved as with improved liquidity and as you move towards a sovereign like borrower Are you still seeing more, I guess more new investors come into your home into your transactions.

Indeed, the our continuous effort to increase our investor base starts to pay out supported of course by the yield environment, which makes it attractive for investors to invest in Europe and therefore we see here increasing demand from from outside Europe and in the first transaction this year as well as in several transactions last year. We see here strong demand and new investors from regions like Southeast Asia and the MENA region. But also, Australia and Canada are increasingly active in our bonds. And here not only the public sector, the reserve managers and the sovereign wealth funds, we also see increasing demand hear from asset managers from insurance companies and from the pension industry.

And what's your your focus now in terms of developing the investor base further in terms of themes, regions and investor type?

Well, our focus is here to further globalize our investor base, we think there is still more room. This is also linked to the perception and the treatment of EU bonds. Many large investors outside Europe are focused on the government bond market and have to implement into their into their investment policies into their risk risk frameworks. The EU Whoa, and to amend them in a way that it reflects the new position of the US as sovereign, like, in large liquid and safe issuer in the market. All this needs time, there are a lot of decisions needed, each investor has its own internal governance. And but it's an important step on our way to a sovereign like issuer and to be treated like sovereign in the market, that all these investors who are typically buying government bonds are considering EU bonds as a sovereign like alternative.

Yeah, thank you. And it's important to note is that it's a journey, but it's been quite a quite a rapid journey that terms of the US progress in terms of, you know, becoming becoming a safe asset and global benchmark for for green assurance and also for the bond markets in general. And I mean, how would you describe that where you is on that journey? Now? I mean, in terms of being that European safe asset and sort of global benchmark? And, and just one more question on top of that, do you think that I mean, do you think that you bonds could ever rival the German bund in terms of a safe asset in Europe.

While it's not our intention to rival with any other issuer, we want to complement here, the existing issuance in the market and finally, strengthen the European capital market by providing another liquid and safe acid, which requires also decisions and steps as I mentioned, on the side of the market participants to make this new liquid and safe European assets also eligible to them. We do what we can from our perspective, we spoke about the quoting obligations, we spoke about the settlement system and we spoke about our next objective to launch here repo facility. And another element we are working on is the inclusion in government bond indices. A lot of money is managed passively or actively, in some way linked to government bond indices. We for traditional reasons are currently included in the SSA indices, but also due to the our fast growing market. This will lead over the upcoming years by end of 2026. If you do some simulations, in some of the SSA indices to a situation where we on a risk weighted basis have a 60 to 70% Share, which is no longer a well diversified index. A similar simulation on some of the existing EGB index indices, gives us here share depending on the assumptions you make about the supply from other issuers in the area of five to 10%, which sounds much better, healthier, more organic than then this 60 70%. So the size of our market with a 1 trillion outstanding debt and of 2026 or close to 1 trillion. We will be the fifth largest issue. Also in terms of outstanding volumes. We are currently the fifth largest issuer in terms of annual issuance volumes, we will become the fifth largest in terms of outstanding volumes already this year. The market infrastructure we are creating the ecosystem we are creating the way how we approach the market our communication, the issuance formats of auctions and syndications. Or this is much closer to a sovereign bond market than the typical SSA market. And there's also the question about the character of the US and issuer. We are not a sovereign, and we have no political ambition to become one. However, looking at the structure of the EU, I think we are also not a typical SSA issuer. The EU is based on a budget and finally relies on the Euro strength of the European taxpayer on European taxpayers money. Why are the GNI contributions from our member states and via some direct own resources, like the customs duties? In addition, member states have in the EU treaty transferred some serenity to the EU. The EU has legislative power 80% of The National Law in Europe is based on EU law. The EU has a Court of Justice. There is a European current See the euro and a central bank, we have a parliament or this is also not typical for SSA issuer. So we are somewhere in between traditionally, because of our market activities in the past placed in the SSA segment. But it's worth to ask the question if this is still appropriate, or asking the question in a different way. How would EGB index or an SSA index be designed? If you would start it now from scratch? Where would you put the EU? Would you put it because of the market structure more in the b2b space? Or would you put it still in the SSA market and this needs to be discussed. And we are actively here, doing this with our primary dealers, with our investors. Finally, it's important what they think and also with the index providers.

Thank you. So we'll leave it there. Good luck for the year ahead and all the important developments that the European Commission is working on this year. On fifth, we're proud and delighted to once again be playing small pots with the commission this year in taking the team to meet with investors in Dubai and Singapore. And for our listeners and network. Our first public and impersonal event will be taking place on March the 21st in Paris, with our annual public sector debt Summit. It's the first of our two flagship events of the year. Please do check out our website for further details. And to register we already have a great lineup of speakers including the European Commission, the UK and Italian debt management offices as well as a number of leading asset managers at this event. We'll also be revealing the results of our annual public sector debt Outlook Survey, where we will be revealing an insight from borrowers on the funding environment and plans for the year ahead as well as their thoughts on some key thematic issues. So thank you once again, Siegfried. And for everyone for tuning in. That's it for me many things.

Thank you one.

Thank you secret.

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