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European Borrowing Costs Drop on Proposed Coronavirus Fund -- Update

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05/19/2020 | 05:21pm EDT

By Caitlin Ostroff

Bond yields in Europe's riskiest economies fell Tuesday after France and Germany proposed a recovery fund to support countries hard-hit by the coronavirus.

Investors took the proposed EUR500 billion ($546 billion) fund as a sign that the European Union's richest members would support nations with limited fiscal reserves. In particular, that could help highly indebted Southern European countries such as Italy and Greece whose borrowing costs have risen during the pandemic. The new financial support would come on top of a EUR540 billion coronavirus response plan already agreed upon by European Union member states.

The yield on Italy's 10-year bond fell to 1.649% from 1.761% Monday -- its lowest in more than a month. Yields on Greek bonds fell below 2% for the first time since mid-April, and yields for Spanish and Portuguese 10-year bonds fell 0.08% each. Yields fall when prices rise.

"We see yesterday's announcement as pretty significant. With France and Germany at the table, I would expect something similar to what has been proposed to come through," said Mohammed Kazmi, a portfolio manager at Union Bancaire Privée.

The pandemic has stirred up long-held worries about the stability of the eurozone. Wealthier members including Germany and the Netherlands have pushed back on calls for full joint debt issuance, where all eurozone countries would share the burden of financing the region's recovery -- and make them liable if one nation defaults.

Monday's proposal stopped short of joint issuance. The fund would be financed by debt issued by the European Commission, the EU's executive body, and the proceeds disbursed through grants and funds to severely affected regions and sectors. The debt would be repaid by member states, though how much the main beneficiaries would contribute wasn't immediately clear. Analysts expect Germany's willingness to extend grants will bring more reluctant nations on board.

Some northern European nations have already pushed back. Austria's chancellor said Monday that aid should be given through loans, not grants. Another concern is that the fund would go into effect next year, even though countries face a more immediate need to finance recoveries as lockdowns ease.

"That's a long way for markets to wait," said James Athey, senior investment manager at Aberdeen Standard Investments. "Even if it was to go ahead without any glitches, there's still a lot of road to travel to see the economic and fiscal benefits."

The European Commission will set out next week its formal proposal for a recovery plan, launching what could be several months of discussions on how the fund will work.

In U.S. government bond markets, yields on 10-year Treasurys fell to 0.711% from 0.741% Monday. Yields on 30-year Treasurys fell to 1.433% from 1.456% Monday.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

 

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