“The Commission’s debt management for the NGEU got off to an encouraging start”, said Jorg Kristijan Petrovič, the ECA member in charge of the report. “Although the instrument is temporary, the debt will be serviced for over 30 years. Our children and our grandchildren will have to pay it back. Therefore, the Commission needs to adjust its rapidly built capacities and report better on debt management performance.”
By the end of June 2022, the Commission carried out 65 NGEU borrowing transactions amounting to € 195 billion. The auditors found that the borrowing costs in the first year of operation reflected its market position. The development of the market yields of NGEU bonds was comparable to those of member states’ sovereign bonds with similarly high credit ratings (such as France and Austria). The Commission also met all key regulatory requirements concerning the debt portfolio and risk management, while at the same time providing for a good level of predictability about the NGEU funding programme and confidence in EU debt among market participants.
However, the Commission is accountable mainly for providing enough funds in good time. Accountability for the programme’s other debt management objectives remains unclear. Indeed, the Commission has not clearly set out its debt management objectives in the NGEU funding strategy. Consequently, its measurement and reporting on performance was found to be in short supply. For example, the executive does not report enough on how it minimises borrowing costs, or on what proportion of the proceeds of green bonds is spent in line with the EU’s environmental classification system, known as the “taxonomy”. The auditors ask the Commission to formulate clear debt management objectives, report on its performance, and consistently document pricing decisions for EU bonds syndications.
The auditors find that, although the Commission relatively quickly – in six months and challenging circumstances – established a skilled and experienced core team to start borrowing activities on a large scale, it still relies heavily on temporary staff to manage its debt operations, which can put business continuity at risk. The auditors call upon it to implement an appropriate workforce strategy, reinforce the role of the chief risk officer, and set up a middle office to monitor debt management trade-offs and assess the performance of front-office debt managers.
Background
The Commission has a long history of back-to-back funding through several lending programmes. For NGEU, which is much bigger and has less predictable funding needs, it was required to develop a new debt management approach urgently. Its diversified funding strategy, which decouples individual borrowings from disbursements, is now the EU’s default debt management approach. Up to June 2022, syndicated issuances of EU bonds represented the biggest single element of NGEU borrowing, including bonds, bills and money market transactions. Investors were mainly fund managers, bank treasuries and central banks. Most investors were from the UK, followed by Germany and Benelux. Since early 2022, rising market yields and price volatility have affected all bonds and securities in the EU, including NGEU. NGEU debt will have to be fully repaid by 2058, either by the borrowing member states (for loans) or the EU budget (for grants). The auditors focused on the NGEU debt management system up to June 2022.ECA special report 16/2023 “NGEU debt management at the Commission: An encouraging start, but further alignment with best practice needed” is available on the ECA website eca.europa.eu.
