MNI EXCLUSIVE: No Summit Deal Seen On EU Corona Fund Size

By David Thomas

     BRUSSELS(MNI) - Northern states are set to stymie a southern push for rapid

agreement on a one-trillion-euro-plus coronavirus recovery fund at Thursday's

European Union summit, but support is building for its funding to come from the

EU's budget rather than joint bond issuance, EU sources told MNI, with one

suggesting payments could be disbursed over several years.

     Haggling over the size of the enlarged budget could take weeks if not

months to resolve, and a potentially fraught European Council meeting is likely

to conclude with leaders asking finance ministers to keep working on the design

of a fund, sources said, adding that Germany was edging closer to accepting that

disbursements should come in the form of grants, not loans.

     While some officials said a Spanish plan circulated to member states Monday

for a EUR1.5-trillion facility backed by perpetual bonds was well argued, they

cast doubt on its chances for success any time soon. Instead the Commission

could leverage its budget to increase its existing issuance, officials said.

     --NEW JUNCKER PLAN

     One source familiar with discussions at EU level suggested a EUR500-billion

plan mooted by European Stability Mechanism Managing Director Klaus Regling,

which would come on top of EUR500 billion already allocated to boost the ESM and

the European Investment Bank as well as for EU unemployment insurance, was

probably "more sensible" and more likely to win support.

     "I am not sure it's wise to start with such a big amount," the source said,

referring to the Spanish proposal.

     Funds from the recovery plan would most likely be disbursed over a two- to

three-year period and would be followed by a new 'Juncker Plan', another source

said, referencing the EUR315 billion Infrastructure Investment Plan announced by

former Commission Chief Jean-Claude Juncker in 2014.

     Investors would not find the perpetual bond attractive without a

high-paying coupon or an EU tax to back it, according to a third official.

     "I find it hard to see debt-obsessed Germans, who think passing on their

own debt to the next generation is a sin, would accept passing the repayment of

what is de facto subsidised peripheral debt to future generations," the source

said.

     --GRANTS NOT LOANS

     Germany would find it easier to agree to use the next EU budget for the

fund, and for the money it provides to come in the form of grants than to agree

to new "financial engineering" schemes, he said.

     Another official agreed: "Grants are the big issue, but only grants allow

real transfers."

     While Thursday's summit is unlikely to reach any consensus on the fund's

size, agreement on its funding mechanism is quite likely, with an expansion of

the European Commission's budget the most probable option, another official

said. It is too early to say how quickly any funds would be disbursed, the

official said.

     Commission President Ursula von der Leyen has called for the 2021-27

Multiannual Financial Framework to be front-loaded, but talks on member

countries' contributions are stalled, having already been significantly

complicated by the UK's exit from the bloc even before the pandemic hit.

     Some states take the view that agreement on the recovery fund can wait

until EU economies begin substantially reopening, given the initial EUR500

billion of measures.

     "It's too early for agreement. And not the right crisis feeling in the

north," one of the officials said.

     "I don't think we're expecting anything for the time being. It's a first

discussion and it's a difficult topic so it will take a bit of time."

     Reported proposals for an EU bad bank also look unlikely to make it on to

the summit agenda on Thursday, with one official describing the ideas as

"absolutely premature."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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