A conversation with European Stability Mechanism

RICHARD KELLY: Thank you, everyone, for joining us for the next installment of our 5x10 Issuer's Podcast Series. I'm really pleased to be joined today by Laura Quinn, Managing Director and Head of Primary Markets for TD Securities Dublin, and Kalin Anev Janse, Chief Financial Officer for the European Stability Mechanism, or ESM. It certainly feels like we are moving to the next stage of the recovery. We're seeing that return to normality move at different paces in different places. And that's creating the need for policies to adjust, I think, as well as some broader rethink about what's the best way to adapt for the future that maybe wasn't even on the radar previously. So today, we wanted to delve into how the ESM is looking at their priorities and goals for the upcoming year, as we take that next step forward. So with that, I will hand things over to Laura Quinn to introduce our guest.

LAURA QUINN: Thanks, Richard. And thanks, Kalin, for joining us today. Kalin runs the funding and investor relations team for the European Stability Mechanism. He is the CFO and a board member of the ESM. He is responsible for 300 billion euro of debt outstanding. And this year alone his team has raised 25 billion euro of funding. So, Kalin, no one could have predicted the COVID pandemic. And thankfully, we're in a much stronger position today than we were 12 months ago, thanks to the vaccines. But this did have an impact on financial markets, particularly in quarter one of 2020. With this in mind, I'm interested to know what you think are the biggest risks facing capital markets on a 12-month view.

KALIN ANEV JANSE: Thanks, Laura. And I think it's a great question to start off with. So we responded quite quickly to this crisis in Europe, from a monetary point of view, then from a fiscal point of view. We had a first response just eight weeks after the pandemic started, approved in April 2020 for 540 billion, of which the ESM represents 240 billion, so my institution. And then last summer, we had the 750 billion Next Generation EU. It impressed markets. According to many, Europe really outperformed. Bloomberg even speaks today that the European model is a success, how it responded to the crisis from a vaccine point of view, as you referred to, but also from a fiscal and monetary point of view. So we are in a good position in Europe. But, of course, there are risks. And we need to be very careful how we emerge from this crisis. I am optimistic that the 750 billion will be used well. We also have the ESM PCS available until the end of 2022, but we need to be very careful how we get out of this crisis. So I'm carefully optimistic, and I'm sure we'll get there. But getting out of a crisis is always the most tricky part.

RICHARD KELLY: Thanks, Kalin. And maybe if we could look at the other side of that, Laura asked about the biggest risks. But with some of the larger budgets, with some of the ability to maybe think outside of the box in a number of areas, what do you see as the biggest opportunities for ESM over the next 12 months? Is there anything in the pipeline that you're particularly excited about from a funding perspective?

KALIN ANEV JANSE: So the biggest change for the ESM is that we have a new mandate. So in the midst of the crisis, our governments, the 19 countries of the eurozone, approved the upgrade of my institution. So at the moment, it is going to all the different capitals in the euro area, and it will be live in 2022, so next year. It will give us a new lending instrument. So we will become the backstop for banks via the Single Resolution Fund. We will start monitoring all the 19 countries of the eurozone. There will be, in new crises, no troika but a tandem, the European Commission and the ESM. And we will be assessing more deeply the debt sustainability and repayment capacity of the different countries of the eurozone. And last and not least, we will play a bigger role in case of disputes between the private sector and the public sector, in case of debt issues. Now, you see some of this new mandate coming up in the media. We published recently a piece that we believe that the economic and monetary union's rules have to change and that we could move away from the 60% debt to GDP and move to 100% debt to GDP, because the world has changed. But we should stick, for example, to the 3% deficit. From a funding point of view, next year we will remain a regular player in the market. We will have 20 to 30 billion in issuance. We want to keep a large investor base, and we look forward to do roadshows more and meet investors physically.

RICHARD KELLY: Thanks. And maybe if I could follow up a little bit. You mentioned the 20 to 30 billion in issuance next year. Is there any other details you can provide for global investors in terms of any of those plans for the 2022 funding outlook? Any new projects or strategic focuses that you're really trying to move into?

KALIN ANEV JANSE: Absolutely. Yes. And I think for investors, the details are what matters. So we will do a total of 26 billion, to be precise, next year-- 18 billion for the EFSF, 8 billion for the ESM. Will have our regular bill program, so the 3, 6, and 12 months, and we will keep issuing it once a year in US dollars. For 2022, also, the ESM Pandemic Crisis Support of 240 billion is still out there. Governments still can trigger it. So the question whether it's used if spreads start to widen. So most governments look at the ESM as a credit line that they can trigger if spreads are too wide, which they currently are not due to the monetary response. So if we see spreads widening, there is a higher chance that the 240 is used by some of our member states. And then the new mandate, the backstop to the Single Resolution Fund. We will engage more with investors to explain what the risks are that are coming out of Europe, but also the opportunity. And maybe let's not forget we have another 410 billion of available capacity. So if the aftermath of this crisis will get us into symmetric shocks, we're there to help.

RICHARD KELLY: Thanks. I wanted to look at ESG. You mentioned risks and opportunities, and there's probably no better example of turning a crisis into an opportunity than what's been a significant acceleration on the ESG front globally. So I wonder, when you're looking at it as a global SSA issuer in your base, what do you see as some of the biggest risks for the further development of the green and social bond markets as we move into 2022 and beyond?

KALIN ANEV JANSE: The biggest risk for me is definitely greenwashing. The market is, at the moment, extremely hot. We've seen the ESG bond market in October, 2021 move to 2 trillion just 11 months after it cost 1 trillion. But it took us 13 years to get to that first trillion. So we see a huge amount of issuances coming out. But, of course, some are more green than others. And I think what is important for 2022 is to make sure that what goes out as green, or social, or government-- so E, S, or G-based issuances-- that they are really E, S, and G. And I think that the EU taxonomy, which is by far the most advanced regulation out there, globally, is trying to help that. And I hope other parts in the world will be following that leadership of Europe.

RICHARD KELLY: Thanks. And maybe if we could bring this back to Europe to close out. I think that the ESM has played such a pivotal role moving us through-- bringing stability, moving through crises over the last decade-- I think we can look at next gen EU as the EU's next arm of trying to further broaden out what we're seeing across European institutions and how they can support recovery in the region. I think the one question we increasingly see-- and it would be great to get your perspective-- is, do you see a situation where the large EU institutions of ESM, EIB, EU are able to bring those funding capabilities and consolidate and merge them at any time in the future?

KALIN ANEV JANSE: Thanks, for this question. And I actually often get it the last couple of months. And the answer is, no. We all have different purposes, shareholdings, and structures. The ESM is the only eurozone institution with 19 shareholders. The European Investment Bank is an MDB, a Multilateral Development Bank, financing projects. We are financing countries. And the EU is a supranational with the 27 countries, so an EU-wide institution. We see this setup in countries as well. If I look at Germany, there's no merger between the Bund and KfW In my own country, the Netherlands, the NWB, BNG, and the Dutch State are also issuing separately into the market. So what is important, I think, for investors, though, is that they see those issuers as similar-- even though they are not the same, as similar. So together, we're bringing around 800 billion of safe assets from Europe into the market in 2020. And this, with all the new crisis response, will be moving close to 2 trillion in the coming years. So we will have real deep European safe assets in the market out of the three institutions. And also [AUDIO OUT] as we are European citizens, at least my shareholders, representing more than 200 million Europeans, for them, it doesn't really matter which institution is issuing. For them, it matters that Europe is solving problems. And I think that's what the three institutions are doing. And finally, one point for investors, because they are the ones that listen to this. For them, the spreads and the active switches that happen between the three institutions is actually very good to create liquidity. And they flatten the curve, so they take opportunities from that. So from a trading point of view, I think it's great that we have these three institutions. So it's a win-win, I would say.

LAURA QUINN: Thanks, Kalin. That's a great note to end our podcast today. I wanted to thank you, very much, for joining us. It's been a very insightful conversation, and it's fantastic to hear how optimistic you are about markets and for the ESM. Thank you, very much, for joining us.

KALIN ANEV JANSE: Thank you. It was a real pleasure.

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