The European Commission has been under pressure to secure long-term financing for Kyiv. Its most likely option \u2014 a \u20ac140bn \u201creparation loan\u201d backed by immobilised Russian state assets \u2014 has drawn criticism from Euroclear, the main custodian of the funds.<\/p>\n
According to the Financial Times, Euroclear chief executive Val\u00e9rie Urbain warned in a letter that \u201cthe resultant risk premium will lead to a sustained increase in European sovereign bond spreads, raising borrowing costs for all member states\u201d.<\/p>\n
The concern centres on whether investors view the scheme as amounting to confiscation, which is prohibited under international law. Any perception that foreign reserves held in Europe could be at risk might undermine trust in European financial systems, driving up bond yields.<\/p>\n
Yet analysts interviewed by Euronews Business say the current proposal carries far less risk than the EU\u2019s original move in 2022 to freeze Russian central-bank assets \u2014 an action that caused only a brief shift in bond markets.<\/p>\n
Robert Timper, chief strategist on the Global Fixed Income Strategy team at BCA Research, said: \u201cI don\u2019t expect much of a market reaction to this, so there won\u2019t be any cost to governments in terms of a higher debt service cost.\u201d<\/p>\n
He continued: \u201cThe immobilisation of Russian assets in 2022 was a first and is what mattered for asset owners, as it meant that they lost access to these assets\u201d. He claimed: \u201cWhat ultimately is done with these assets should have a much smaller effect.\u201d<\/p>\n
The EU froze billions of euros of Russian assets on 28 February 2022, four days after Moscow launched its full-scale invasion of Ukraine.<\/p>\n
Nicolas V\u00e9ron, senior fellow at the Brussels-based think tank Bruegel, said: \u201cIt was a constraint put on the Russian reserves and therefore a demonstration to the world that, given the circumstances, the EU was willing to put big constraints on reserves held on its territory.\u201d He added: \u201cThat didn’t rock global markets.\u201d<\/p>\n
Capital Economics similarly argued that fears of a broad retreat by foreign central banks or sovereign wealth funds from European markets are overstated. \u201cEven if there is some loss of confidence, the impact would likely be small as there is a limited range of liquid, high-quality assets that central banks can invest in outside Western financial markets,\u201d it wrote in a recent report.<\/p>\n
Concerning the shifting trends in the bond market, Timper added that since the immobilisation of the Russian assets in 2022, \u201cwe have observed a broad shift by central banks, especially in China and emerging markets, to gold as a reserve asset.<\/strong><\/a> This trend is likely to continue, but was already underway before the recent discussions around the use of Russian assets.\u201d He expects this diversification trend to continue but added that so far this \u201chas had little effect on sovereign bonds\u201d.<\/p>\n How the loan would work<\/strong><\/p>\n While the details haven\u2019t been released, Capital Economics said in their report that Euroclear would use the cash it holds on behalf of the Russian Central Bank (CBR) to invest in a long-dated, zero-coupon EU bond. Euroclear\u2019s assets would change from cash balances to an EU bond, but its liability to the CBR would remain unchanged. This is key to holding up the law, which prohibits confiscation. <\/p>\n The proceeds from the bond would then be used by the EU to lend to Ukraine. <\/p>\n