Investors reacted positively to the European Union’s decision to fund loans to Ukraine through borrowing, which avoids a controversial plan to use frozen Russian assets. On Friday, EU leaders agreed to borrow 90 billion euros ($105 billion) to support Ukraine’s defense against Russia for the next two years, while Hungary, Slovakia, and the Czech Republic did not participate in this deal. The initial proposal to use Russian assets faced opposition, particularly from Belgium, and raised concerns among financial experts about the EU’s international standing. ECB President Christine Lagarde expressed that such a plan could deter investors from euro-denominated assets.
The EU will keep Russian funds frozen until Russia compensates Ukraine for war damages. A senior European bank executive described a preferred solution as leaving these assets untouched. The agreement on borrowing reinforces the view that the EU is becoming a permanent borrower, a development broadly welcomed by investors. Analysts noted that this move brings the EU closer to the concept of eurobonds, although they cannot be labeled as such yet.
In total, the EU currently holds over 700 billion euros in joint debt from pandemic-related borrowing and plans to borrow an additional 150 billion euros in coming years for defense loans. This new borrowing for Ukraine signals that EU policymakers are committed to using joint borrowing to address future crises. However, there are concerns that this added borrowing might exacerbate existing market pressures, particularly as Germany increases its own spending.
Moreover, using Russian assets would have set a precedent for seizing the assets of a belligerent country during an ongoing conflict, which raised legal and reputational risks for the EU. Fitch Ratings had warned of possible downgrades related to these risks, highlighting that it could affect the euro’s status as a reserve currency. Nonetheless, many investors believed that the risks were manageable given the circumstances proposed.
With information from Reuters