CORRECT: MNI INTERVIEW:Communication Key In PEPP Unwind-Requin

The European Central Bank will need to exercise caution as it exits its pandemic emergency purchase programme, the head of France's debt and treasury management agency told MNI, adding that new bonds to be issued to fund European Union Covid Recovery plans could "change the equation" in terms of supply and demand.

Anthony Requin stressed that central banks have "all the tools to fine-tune the rhythm with which they unwind their balance sheet, they have the capacity to control the impact on yields the unwinding will exert, and I'm sure they will learn from the Fed experience over 2013-19 to be very cautious in the way they operate."

Past experience shows that unwinding QE operations leads to "very delicate moments," the Agence France Tresor chief said in an interview, and the ECB is likely to tread carefully. "An error of communication, too rapid or too slow an unwinding, can have very important effects on markets. They will try their utmost to avoid any hiccup in the process, but you never know - communication errors sometimes happen, for sure."

The European Commission is preparing to borrow some EUR1 trillion over the next few years to fund its Covid recovery fund and other programmes, amid suggestions officials are debating whether to charge the European Stability Mechanism with issuing the new debt, or open a dedicated debt management office.

The Commission will need to ramp up its operational set-up in the coming months to perform the "incredible task they have to execute," Requin said. You have a new issuer on the market, and this is a signature and a credit that will need to establish itself."

EU BONDS CHANGE EQUATION

"In terms of demand and supply it will probably change the equation. Now, we are in a situation characterized by ample liquidity in the market currently, especially given the support and the purchase programmes engineered by central banks, so all in all this should be manageable without exerting undue pressure on yields."

Requin spoke to MNI shortly after France agreed its 2021 budget,with a total financing requirement of EUR 260 billion. Detailed medium- and long-term financing plans for next year are scheduled for release in December.

Outstanding short-term government securities are set to increase by only EUR42.8 billion next year compared with the EUR82.9 billion envisaged earlier in 2020. The ATF will adjust the mix of funding used to manage crisis-related funding demands - a balance between OATs and BTFs - in favour of greater reliance on long-term financing at the end of this year, Requin explained.

"I would say that the increase in the net financing requirement will be two thirds supported by the long-term part of our issuance programme.

"Our medium-term plan, what we can say at this stage with the visibility we have, doesn't call for a sustained increase in the long-term issuance programme. So we've preferred to cap the amount at EUR260 billion, which is an amount the market has proven it was able to swallow this year, and recourse to a small increase in BTFs to smooth out this medium and long-term programme which has been quite important this year."

Next year's EUR18.8 billion increase in T-bill issuance, taking the percentage of short-term bills included in ATF total negotiable debt close to 7.9%, also offers "room for manoeuvre in order to cope, if necessary, with an additional shock on revenues or expenditures, if a second wave of Covid-19 crisis hurts the economy - something none of us wishes of course," Requin added.

NO 70Y OR 100Y BONDS FOR NOW

France was among the first issuers of ultra-long bonds "if you accept that a 50-year maturity is ultra-long," Requin said. "We issued this kind of tenor in 2005, 2010, 2016, so of course you can ask yourself the question of whether this could be part of our financing programme for next year." But on the subject of whether a 70-year or 100-year bond might be in the works, he was unequivocal: "It's a straight no."

However, a new green bond to sit alongside France's inaugural OAT 39 is a possibility. "The bottom line is you need to have quite a lot of green-eligible expenditure to launch a new green OAT," Requin said. "We are in the process of analysing the current budget to see if there is sufficient room to do that. If it is the case then probably it will be a good idea."

So far the French approach has been to bring a new issue to an outstanding that ensures liquidity, Requin said, while Germany has taken another "to provide what they call a green curve very rapidly," Requin elaborated.

"It's an innovation. I think we need to see whether this works in the eyes of investors. We have demonstrated that our conventional approach is also capable of providing liquidity to this bond."