European Commission chief proposed €150 bn defence fund, now markets wait for EU war bonds

After European Commission President Ursula von der Leyen announced plans to raise €150 billion to boost defences in the wake of unprecedented Russian aggression and US withdrawal from the continent, markets are awaiting the European Union (EU) to issue war bonds.

The EU has a good financial rating and its bonds are expected to be popular among institutional as well as private investors, according to analysts.

There is precedent for such fund-raising. In recent years, the EU has raised €50 billion to support Ukraine and €4 billion to help fund investments in the Western Balkans, according to Politico.

Shares of defence firms have been on the rise lately amid signs that Europe will do the “heavy lifting”, in the words of British Prime Minister Sir Keir Starmer, in supporting Ukraine in the war with Russia. British defense contractor BAE Systems, the German arms-maker Rheinmetall, and the Italian aerospace and defense firm Leonardo hit record highs on Monday and pushed benchmark Stoxx Europe 600 to new heights as well, as per The New York Times.

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The development comes at a time when President Donald Trump has aligned the United States with Russia and left Europe in the lurch. In the wake of the new alignments, there is a realisation in Europe that the continent is on its own in terms of defence and security.

Markets wait for EU war bonds

Markets are awaiting EU war bonds and there are hopes the bonds will do well.

The biggest thing in EU’s favour is its rating. Except for Standard & Poor’s, all major ratings companies give it a AAA rating which essentially designates it risk-free. Among EU’s big economies, only Germany has AAA rating.

“The worldwide supply of high-rated bonds has declined following credit rating downgrades. Although there are still many fiscally strong issuers in Europe, the issuance of Eurobonds could be a useful addition,” said Elizabeth Palandeng, a spokesperson for APG, the investment arm of the Netherlands’ largest pension fund ABP, to Politico.

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The EU borrowed money via bonds during the Covid-19 pandemic as well. Such borrowing is particularly beneficial for smaller countries who may not raise funds by themselves but may avail funds from the EU that raises funds from its bonds. The EU till last year raised €330 billion worth of funds to help with the bloc’s recovery and another €100 billion for the job loss programme.

Even though the plan appears to be good, there are still hurdles to be overcome. For one, the plan needs formal approval by member-states. Fiscally conservative members like Germany and Denmark have always wanted EU’s borrowings to be limited so they would need convincing.

Moreover, for now, the EU as a borrower still faces obstacles to getting the best price for its debt as there is no place —at least not yet— for its bonds in the indices of sovereign debt that are tracked by funds that hold trillions of euros in assets, according to Politico.

Inclusion in such indices would essentially make borrowings cheaper.