Europe’s Savings and Investments Union (SIU) is set to unlock vast household savings and direct them into the Small and Medium-sized Enterprises (SMEs), green technologies and strategic projects shaping our future. The Eurobond market’s cornerstone practices – streamlined processes, adaptability and a truly global investor base – offer a proven playbook to accelerate SIU’s journey, unify fragmented capital markets and power a new era of pan-European financing.
A lot of milestone events happened in 1963.
Together with the signing of the Elysee Treaty, cementing reconciliation and cooperation between France and Germany and the rise of Beatlemania, 1963 was also the year Eurobonds were born. What started as a USD 15 million bond issuance by Italian company Autostrade six decades ago, Eurobonds are now a EUR 14.6 trillion global marketplace, which continues to meet the needs of international issuers and investors alike.
If the EU is to address its current challenges, e.g. climate change, fast evolving technology shifts, volatile geopolitics and defence spending shortfalls, etc., an additional EUR 750 billion – EUR 800 billion worth of financing will be needed every year by 2030, according to the Draghi Report.
To plug this sizeable funding gap, the SIU is hoping to unlock billions of euros of trapped household savings across the EU, to facilitate and promote greater investment in SMEs' and innovative companies; as well as reignite the securitisation markets. The creation of a robust debt and equity capital markets framework in the EU will ultimately enable promising home-grown European companies to reduce their historic dependencies on bank-led financing and private equity. As part of its bold reform remit, the SIU is also looking to accelerate integration across the EU’s fragmented capital markets and establish a more harmonised, EU-wide regulatory regime.
*BNP Paribas CIB – March 15, 2024 – Capital Markes Union: U unlocking the potential of Europe’s capital markets
Eurobonds are a type of debt security that enables issuers to tap into global capital markets and raise funds in 100 currencies. These bonds give issuers worldwide the advantage of being able to utilise a wide range of funding options (i.e. instrument types/asset classes – simple or complex) whilst at the same time, being able to leverage a diverse and truly global investor base. The versatility and global accessibility of Eurobonds make them a highly attractive financial instrument in the international marketplace.
The challenge, however, is that a lot of these ambitious initiatives have been attempted before, under the auspices of the CMU, the SIU’s predecessor and the results were disappointing.
“Introduced ten years ago, the CMU Action Plan – together with its Second Action Plan in 2019 – have not delivered the expected results. Compared to the US and even the Asia Pacific region to some extent, the bulk of EU savings are still parked in bank deposit accounts, whilst capital markets are in need of greater standardisation and harmonisation,” said Kuhnel.
The proof is in the pudding. According to European Central Bank (ECB) data, aggregate equity market capitalisation corresponds to 81% of GDP in the EU, versus 227% in the US, while the bond markets in the euro area are three times smaller than in the US.*
“Although fixed income markets are - broadly speaking - more harmonised than equities, EU savings are not being deployed because the EU remains a fragmented marketplace, with 26 different settlement systems. There are also different regulatory bodies in each of the individual member states, so securities laws and taxation regimes, for example, are not harmonised across the EU” noted Kuhnel.
Kuhnel continued: “The basic foundations which are needed to support seamless capital markets, including a robust fixed income market, are not yet there and this is hindering growth.”
Although the SIU faces some stark challenges ahead, there are grounds for optimism.
Learning from the Eurobond market could provide a useful steer for the SIU, helping it to succeed and deliver on its objectives, highlighted Kuhnel.
Even today, Eurobonds are showing no sign of losing their momentum. With annual new issuance activity of 470,000+ unique securities in 2024 alone, Eurobond market borrowing volumes are growing at more than 5% each year, while the number of securities has increased by 9% per annum since 2018. “The Eurobond model continues to be very well positioned as the preferred borrowing vehicle for over 12,000 issuers located across 130 countries,” added Kuhnel.
But, why have Eurobonds flourished?
Firstly, the mature and harmonised processes and associated industry standards underpinning Eurobonds have been refined over the last 60+ years. They are homogenised and are also being continuously improved upon, through both regulatory and market requirements.
"To make sure Eurobonds remain relevant and fit for purpose, we are always looking to achieve better harmonisation, efficiency and risk reduction. Most recently, at a Euroclear-level, we have been involved in developing an Issuance and Processing Taxonomy (IPT), the aim of which is to align on a common set of data points across the international capital markets as an enabler for an end to end digital data flow, complementing the Bond Data Taxonomy (BDT) work done by the International Capital Market Association (ICMA)," said Kuhnel.
He added: "The IPT was designed jointly by both International Central Securities Depositories (ICSDs), to support issuance, the registration of assets and the new issue settlement processing. Just as we have delivered on standardisation in the Eurobond ecosystem, Financial Market Infrastructures (FMIs) will need to do the same thing to drive forward SIU."
The Eurobond market’s adaptability and agility is another reason why it has stood the test of time. What began life as a fairly traditional fixed income instrument, the available options for Eurobond issuances today are now incredibly diverse, ranging from frequently used Money Market Instruments, to convertible bonds, right through to equity-linked bonds and Environment, Social, Governance (ESG) bonds among other innovative funding asset classes. "The Eurobond market has remained fit for purpose for over 60 years because the supporting financial market actors have shown a continuous willingness to adapt to changing global circumstances," said Kuhnel.
Given the pace of change lately, digitalisation has also been a core feature of Eurobonds.
"We are moving away from the legacy physical global note certificates towards a fully dematerialised and digitalised framework for Eurobonds. As we progress further into the 21st century, we are continuing to adapt the model further through the introduction of Distributed Ledger Technology-enabled digital FMIs and digitalised assets. SIU will also need to embrace modernisation if it is to support further innovation and digitalisation of the capital markets," said Kuhnel.
An embedded culture of standardisation, adaptability and modernisation have driven the unprecedented growth of Eurobonds. If the SIU is to transform the EU’s capital markets, it should look closely at the success of Eurobonds and the reasons why they continue to be the funding vehicles of choice for issuers worldwide.
