Monday, July 4

Brussels ‘pardons’ four banks vetoed to place the debt with which it finances the recovery funds

The European Commission debuted last month in the issuance of common debt to finance the aid plan to member countries to alleviate the economic effects that the pandemic is causing, known as Next Generation. There are already two occasions in which the Community Executive has gone out to the market to look for investors for its debt, something that has raised a lot of interest among potential participants in this type of issuance, achieving many more requests than the money offered. However, the second time that Brussels has gone to the markets brought with it a novelty. Several entities that had been vetoed in the first issue, were acquitted for the second.

These types of issues are usually carried out by contracting financial entities that are dedicated to placing these debt bonds among interested investors. The issue held last week was placed by Crédit Agricole, Deutsche Bank, Unicredit, JP Morgan, Goldman Sachs, BBVA and Erte Group. The first four are the banks that, having been sanctioned in different investigations on market manipulation and against competition, had been vetoed by the Community Executive from participating in the first round of placement of this debt.

The European Finance Commissioner, Johannes Hahn, defended this decision after the first auction, claiming that “the necessary measures had to be taken” against the banks involved in cases of collusion. “We have to apply our regulation and our standards,” he emphasized, noting that he had been asked for corrective measures, avoiding pointing out how long this veto would last. “We will look at it carefully and as quickly as possible,” he settled in an interview with CNBC. Just a few days after the first broadcast, it was known that the Commission had lifted this veto. Nomura, Citigroup, Bank of America or Barclays were other entities that saw their veto lifted, although they did not participate in this second issue. “The eight banks have provided information that allows the Commission to conclude that their further exclusion from participation in syndicated transactions in the issuance of EU bonds is not justified,” said the Executive. as reported by Reuters.

The agency itself made a estimate of what these banks were risking for not participating. Although the commissions charged by these banks differ depending on the operation, it is estimated that it is around 0.1% of the value they must place. Only in the first issue, in which they did not participate, they stopped participating in the distribution of 20 million euros in commissions. The amount, taking into account the issues planned for the entire year, would be around 80 million euros to be distributed by participating banks.

The four banks pardoned from that ban that participated in the second issuance have been immersed in recent months in various investigations carried out by the European Commission and other authorities, which ended in sanctions, some of them historic. These sanctions were accompanied by a veto to participate in the European Commission’s debt issuance operations, although the latter has considered the commitments assumed by these entities sufficient to be able to be present in the second operation.

Manipulation of debt markets

Credit Agricole and Deutsche Bank were convicted in April of this year by Brussels for having mounted a cartel, together with Bank Of America and Credit Suisse, in the debt bond market. The sanction amounted to 28.4 million euros, although the German entity avoided this fine for having revealed the existence of the cartel. “The behavior of investment banks restricted competition in a market in which investment and pension funds regularly buy and sell bonds on behalf of their investors and pensioners. The cartel hurt financial markets and today’s decision sends a clear message that the Commission will not tolerate any type of collusive behavior, “the Commission pointed out at the time.

This case sentenced by the European Commission concluded that the four banks made agreements, connecting in chat rooms, creating a closed circle of trust. In this way, they exchanged sensitive commercial information and coordinated prices. The internships lasted for five years in the secondary market. Debt bonds are issued in the primary market, but later it is the financial institutions that negotiate in the secondary market with these securities.

Much greater was the case in which the Italian Unicredit, the largest transalpine entity, was involved. In this case, it was a sanction announced in May of this year, just one month before the placement of community debt in which it has been able to participate. In this case the fine was 371 million euros and it affected not only Unicredit but also Natixis, Nomura, UBS, Bank of America, RBS (Natwest) and WestLB (Portigon). Although the sanction only affected Nomura, UBS and Unicredit, the rest either collaborated or have prescribed their infraction.

In this case, the existence of a cartel in the debt bond market in Europe was also observed, with the aggravating circumstance that this time it occurred during the last financial crisis. These banks shared information on their strategies regarding the purchase of euro zone government bonds, at a time when countries had to significantly increase their debt. “It is unacceptable that in the midst of the financial crisis, when many financial institutions had to be bailed out with public funds, these investment banks colluded in this market at the expense of the EU Member States,” the Vice-President of the Commission said in May. and Competition Curator, Margrethe Vestager. “A well-functioning European government bond market is paramount,” he then decided on these anti-competitive practices.

The case in which JPMorgan was implicated is the largest. The entity was fined, along with Barclays, RBS, Citigroup and MUFG, with 1,000 million euros. The Commission concluded in 2019 that these entities had participated in two cartels to manipulate the foreign exchange buying and selling market, sharing confidential information on strategies and clients and coordinating operations. The cases refer to the period between 2007 and 2013, also in the midst of the financial crisis. Specifically, JPMorgan, one of the Commission’s debt underwriters a few days ago, was fined 228 million euros.

One of the largest emitters on the continent

The Commission had previously issued bonds within the SURE program, in order to finance the cost of schemes similar to ERTEs in EU countries. However, it was in this month of June when it began to issue bonds to finance the Next Generation fund, for the recovery plan. The first of these rounds was held on June 15, still with the entities vetoed without being able to participate. Then 20,000 million euros were captured, with a demand that exceeded 142,000 million. On this second occasion, with the banks already pardoned, the European Commission captured 15,000 million euros in bonds for 5 and 30 years, with the demand being even higher, of 173,000 million.

These issues are only the initials of a much larger program, of some 800,000 million euros that the European Commission hopes to capture in the markets, of which a tenth of it expects to obtain during the remainder of the year. It will be mainly after the summer when the Community Executive begins to regularly look for investors for its debt bonds to finance the important aid program that the states will receive in the coming months. As financial media have explained, this makes the Commission one of the largest European issuers of public debt, which has captured a great expectation among investors, so that for the banned banks they could have been seen outside one of the larger bonus programs.