EU leaders agree to $850 billion coronavirus recovery fund

A €750 billion ($858.1 billion) coronavirus recovery fund for the European Union is being welcomed by money managers.

Following four days and nights of negotiations, EU leaders came to an agreement late Monday on a recovery package and a 2021 to 2027 budget to help member states rebuild their economies after the COVID-19 pandemic. The package of stimulus will also support investment in transitions toward green and digital economies.

The total €1.82 trillion in stimulus includes a long-term EU budget; the multiannual financial framework; and "an extraordinary recovery effort," the Next Generation EU instrument or recovery fund.

The €1.07 trillion MMF covers the period 2021 to 2027, and is "the main instrument for implementing the recovery package to tackle the socio-economic consequences" of the pandemic, said a document outlining the agreement and published on the European Council's website.

The €750 billion recovery fund falls under the Next Generation EU part of the package. It allows the European Commission to borrow up to this amount on the markets, to be repaid by 2058. From that fund, €390 billion will be distributed as grants to member states and the remaining €360 billion as loans, the document said.

Money management executives welcomed the significance of the deal with regards to the integration of the EU, bond markets and the euro.

"A large part of the deal will be funded using bonds issued by the EU and jointly financed by the member countries," Paul Brain, head of fixed income at Newton Investment Management, said in an emailed comment. "For the first time, the liability is spread across the EU."

Mr. Brain expects EU sovereign and corporate credit risk to narrow due to the recovery fund and the European Central Bank's ongoing asset purchase program.

The deal also reduces the risk of the union breaking up.

"The determination shown by Germany, France and Italy to work together on an ambitious recovery program sends a strong signal and reduces the risk of a eurozone breakdown," Quentin Fitzsimmons, portfolio manager at T. Rowe Price, said in an email. "Germany putting a stamp of approval on the extension of fiscal deficits for European countries is not only favorable to the euro, but also to eurozone periphery debt and corporate bonds, as it should translate into more demand for European assets."

Mr. Fitzsimmons said the euro is expected to strengthen. As of 3.30 p.m.. BST, the euro had gained 0.27% to $1.15.

However, managers also noted that some terms of the deal had been watered down from earlier proposals.

"As usual, the negotiations were tough and long ... an the ambitions of the initial plan have been watered down: The share of grants (within the recovery fund) has been reduced from 67% to slightly above 50%," Florence Pisani, global head of economic research at Candriam, said in an email.

Money managers also highlighted that green projects should also be on the horizon.

Commenting on the package, Ursula von der Leyen, president of the European Commission, said at a news conference: "Europe's recovery will be green — the new budget will power the European green deal, it will accelerate the digitalization of Europe's economy. ... Europe as a whole has now a big chance to come out stronger from the crisis."