Shay Brennan probes EU loan structure, risks and seniority
Shay Brennan questioned the operation and risks of the EU borrowing instrument, asking about interest rates, loan structure, seniority, fungibility and stress-testing. He pressed for clarity on who issues the debt, how the loans are funded, and whether provisioning and audits cover default scenarios.
Questions on interest rates and loan structure
Brennan explained he had missed part of the meeting and referenced a question from Deputy Doherty about interest rates. He asked whether the loans are sovereign bonds, EU-issued bonds, or third-party bank lending and was told that the EU borrows on capital markets and then lends to Member States, providing a lower-cost source of funding for high-debt countries.
Concerns about fungibility and domestic borrowing
He raised a scenario in which a Member State might re-label spending or use the EU instrument to replace domestic borrowing - for example by moving planned military spending into the EU-funded scheme and reducing other higher‑cost borrowing. Officials replied that Member States must submit spending plans and that the Commission applies controls, checks and audits, while noting that "money is fungible" and that such outcomes remain speculative.
Seniority, defaults and stress testing
Brennan asked where the instrument sits in the pecking order if a country leaves the Union. The response was that the obligation would be handled as part of an orderly exit and that the instrument constitutes sovereign borrowing, with default carrying consequences for wider borrowing costs. He was told the Commission conducts stress testing and reports annually on contingent liabilities, citing an upcoming Article 256 report and references in the draft budget working documents (working document 11), and that past assessments have judged provisioning adequate.
Funding mechanics and ongoing oversight
He also asked whether a Member State drawdown would force the EU to raise funds immediately on the market or use existing EU funds. Officials described a diversified, unified funding strategy in which the Commission undertakes general EU borrowing rather than borrowing for each specific instrument, and confirmed ongoing assessment and monitoring once the borrowing begins.
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I missed a portion of the meeting due to other commitments, so if I ask a question and it's been answered, just tell me and I can just play back the video and just obtain the answer that way. But I did, on the way out of the office, I think I heard Deputy Doherty ask what the interest rate on the loans are. Maybe you could confirm that to me? Well, Ireland hasn't applied. Okay, to step back then. What is the structure of these loans? What's the instrument? Are they bonds issued by the sovereign nations? Are they bonds issued by the EU? Is it third party bank lending for example? I can give a little bit of an overview but my colleagues in the Commission might be better placed. But essentially the EU is borrowing the money on capital markets and on lending it to Member States. Okay, so the Member States, it provides a different source of funding for Member States. And for high debt Member States who face higher levels of borrowing costs, the Commission, the EU can borrow for cheaper than they can. So it provides them with a lower source, a lower cost source of funding for the purposes of the spending under the regulation. Okay, and that's advantageous to the borrowing nation. Is there any danger that nations would use this fund, redirect their military spending and use this fund essentially to replace borrowing they're doing elsewhere? I'm not sure I fully follow. You mean that they wouldn't spend the money on what the regulation stipulates they should spend it on? Well, essentially, yes. No, I think the Commission, again, will have more detail. But to my understanding, Member States has to enter into a plan, set out a plan of how they spend, how they intend to spend the money. And then the Commission has a series of controls, checks, audits, etc. But the Commission can provide more detail. I guess maybe to just give you an example for that point, maybe it might just help me get it across. So if you're spending 100 million on your military, and you're borrowing within your economy anyway, for other reasons, the 100 million you spend on the military, given that you're doing it anyway, could you now put that under the safe instrument and borrow from the EU that 100 million at a lower rate, and thus reduce your borrowing elsewhere that you're going to spend in the domestic economy at the higher rate because of your sovereign rating? Essentially, yes. I mean, money is fungible. Yeah. Okay. Okay. Is that likely to happen? And I'm sorry, Matthew, I'm not just directing them all to you. It's kind of a general question. I mean, it's a very hypothetical, speculative question about what other countries would do. Fair enough. So what is the seniority of these loans? And I'm thinking of a scenario, kind of a Brexit-type scenario, for example. You know, a nation actually leaves the EU, and they have obligations to the EU. Where in that pecking order does this particular instrument sit? If I may come in and do that. I guess, I mean, if a country is leaving the EU, I mean, we would have to organize a proper leaving the union. And that would be part of the obligations of that country as we did with the UK. I mean, the UK has to pay back certain elements as part of their obligations coming from a membership. So that would certainly be the same. So that would be part of the obligation of that country leaving properly the union. But it is essentially sovereign borrowing. So a default on this is the same as sovereign defaults, which has fairly significant consequences for any member state for their wider borrowing costs. Yeah, yeah, yeah. Sovereigns defaults all the time. And just going a bit further on what the chair was asking. The tone is quite optimistic that no one's going to default. But have any scenarios been run? Any actuarial scenarios? I mean, you know, if a bank's telling you money, they're going to do their due diligence. They're going to work out the probability of defaults. Has anything similar to that been done? I can cover this in the round. And the Commission might wish to comment specifically on the safe instrument. This isn't the only borrowing instrument that's guaranteed by the headroom of the EU budget or guaranteed by provisioning. And the Commission reports annually on the stress tests and other qualitative and quantitative testing it does of our contingent viabilities. They report on it in a number of places. There's one report that should be due out in a few weeks, which is called the Article 256 report on the contingent liabilities of the union, where they set out the outcomes of stress testing. And also in the draft budget every year, the working document 11, I think, which covers the borrowing that's provisioning. So again, sets out the risk involved. And in each case to date, they've stated that the provisioning is adequate, and that the existing mechanisms are able to cover even the most adverse scenarios. But that's obviously backward looking. So the latest reward we have is for the financial years, either 2024 or 2023, depending on the report in question. So I'm not sure if the Commission might be able to add specifically related to the safe, but that once the safe borrowing begins, they will be carrying out all of this on an ongoing basis, including for the safe borrowing. And I appreciate that before a default takes place, work would be undertaken to restructure and to assist that nation. And even without this instrument, a European nation, EU nation defaulting is problematic for the union. So support would be there. So just, I suppose, one final thing I want to understand. If a nation comes in tomorrow to draw down 5 billion, is it a case of the EU has to go now go to the market and raise that 5 billion? Or will the first X amount be taken from existing EU funds? The Commission operates a diversified funding strategy, a unified funding strategy, which essentially means that rather than borrowing for each specific instrument, they do general EU borrowing and then kind of pass it on to each EU instrument. So it would have to be new borrowing in the sense that this is newly created and the money, as discussed before, doesn't come from the actual union budget at all. It's coming from borrowing on the market place. But when the Commission goes to the capital markets, it goes to seek EU bonds rather than safe bonds. OK, I should have this figure, but if you haven't had, what's the current level of EU debt? Well, I can point you to where more information on that can be found, but I will say that it changes quite regularly because of both re-borrowing and repayment of existing borrowing. But the European Court of Auditors published its annual report just last week and that did go into the level of EU debt, which is, you know, as of end of 2024. So that would provide further information on that. But like I said, it does change. OK, thanks. I'll obtain that figure myself. So I suppose final question, and just related to that, what level of default can the EU absorb before a call, a capital call, is made on sovereign nations? Or the Commission, I don't mind. So it is, this is speculative, so I don't really want to get into the details. But essentially, you have the EU budget as it exists, and in the extremely unlikely case of a call on the default, you are going to look at the various measures available before calling in additional funds from Member States. And whether that's another way of claiming, you know, the European Commission mentioned earlier that the Commission will always owe Member States money at a different point in time, and that being able to, you know, one extremely speculative option is that it doesn't pay, if you use it to net that off. But again, like I said, there are a lot of different options you can take in your overall budget about how you're going to spend the money you have to meet the financial obligations you have. Yeah. OK, thank you. Apologies for my scattergun questions. If I could just make one distinction there, Deputy, that this isn't a increase in common debt for the EU, in the case of, in the same way that the Recovery and Resilience Facility was, where the EU issued debt to fund the Recovery and Resilience Facility, and it's been paid back through the EU budget, it will make those payments on the debt. It's the Member States which will pay back this debt. The Member States who benefit from the borrowing will pay it back, and that in turn will pay back the EU's debt. So it's not where it's being serviced from. I appreciate that, but it is an increase in EU debt. It's on the EU's balance sheet, and I know there's another side to it. My concern, just kind of a parting comment, it's not about a default of a single nation. Like I said, I believe the EU is there to support a single nation that gets into difficulty for whatever reasons financially. It's systematic risk here. If the worst-case scenario happens here, and the nation has to default because it's invaded or it's a war situation, it's quite likely that's not just going to be one nation. Quite likely that whatever causes that nation to default, it's going to be contagion to other nations, or whatever the cause is, is also going to apply to other nations. So that does create, albeit a black swan event, quite a serious one. And if that were to occur, individual countries would have difficulty in meeting their obligations towards the 150 billion, I would imagine. Where will that leave the overall EU project financially? I would just say, look, I think it's impossible for us to speculate on it, because what you're talking about is a really significant political event that a vast majority, a vast number of different scenarios will, political, financial, etc. would be involved. So I don't think I could comment. Look, I appreciate it. Our role here is to ask those probing questions, those just-in-case questions. So I just wanted to get a view as to whether that had been thought through, or to what extent it had. I'm pretty much done. Have I time for one more question? Just not related directly to... We'll let people in for a second round anyway, so do you want to even have a think and come back, or do you have one final, final question? Just one final, final question. And I might have missed this, and tell me if I did. Will there be any specific amount mandated to be spent in Ireland? For example, we would have drone building capabilities. I know a percentage of the military spend has to be spent within the EU. Would a portion of that be mandated for Ireland? I'd say that's the Commission to answer. Let me try to respond to that, and please, Guillaume and Dinka, jump in as necessary. So there will be no identification of where the money is spent specifically at this stage. So it is really the choice of member states that take the loans to decide where to spend this money. So at this stage, it is not possible to tell you whether any of this money will be spent in Ireland or any other member state specifically.
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