EU member states affected by the pandemic have made it clear that they intend to fully exploit the € 390 billion of recovery fund grant leaders agreed in July. What is much less clear is to what extent they intend to take advantage of the cheap loans that the European Commission also offers.

Country including Spain and Portugal have sent mixed messages over their appetite for the tens of billions of euros in low-cost loans the EU is making available under the joint borrowing program. Italy, for its part, has indicated that it wants to use all the loans, while many wealthy states in northern Europe are likely to reject them altogether.

European finance ministries face a series of complex calculations as they seek to make up their minds. The EU’s coronavirus recovery fund is split between non-repayable grants, which are in high demand, and a lending program where the commission will effectively borrow on behalf of countries.

The latter would allow the fiscally weaker capital to have access to additional financing representing up to 6.8% of their gross national income at rates lower than those which they themselves can obtain on the markets. But the recent rally in sovereign debt markets means the savings may not prove to be decisive, the Financial Times calculations suggest.

What’s more, member states might be disheartened as they seek to keep their debt-to-GDP ratios as low as possible, especially given the lack of clarity on the outlook for EU fiscal rules. They also assess the additional conditions attached to the money from the EU stimulus fund.

“EU governments may be reluctant to be subject to any sort of conditionality and prefer to borrow using national bonds, or not borrow at all,” said Lorenzo Codogno of LC Macro Advisors.

This despite the benefits some countries would derive from using EU loans, he said, including interest savings, the possibility of benefiting from a different investor base and an extension of the maturity of their debt.

The EU issued its first tranche of coronavirus bonds this week, in a heavily oversubscribed sale which indicates that the EU will be able to charge extremely low borrowing costs as it raises funds for member states.

The loan, which was tied to the commission’s “Sure” unemployment reinsurance program, is a separate program from the stimulus fund, but it indicated huge demand, with investors bidding for more than $ 233 billion. euros, far exceeding the 17 billion euros in bonds initially offered. .

The returns from this debt sale indicate that southern EU countries could save money if they seek to exploit future commission funding rounds instead of raising the same money in their own books. Spain would save 5.6 million euros per year for every billion euros of borrowing by using the loans from the stimulus fund, according to ING’s calculations, while the savings for Italy would be greater at 11.7 million euros per year.

Greece could save 12.8 million euros for every billion euros borrowed and Portugal 5.5 million euros, according to calculations based on countries’ current borrowing costs compared to the Sure issue of the Commission.

Johannes Hahn, the EU budget commissioner, suggested on Wednesday that the low rates the committee enjoys could convince some member states to reconsider any previous reluctance to use the stimulus fund loans.

Spain, which expects to receive around € 70 billion in stimulus fund grants and roughly the same amount of loans, is focusing on its grant allocation plans in the 2021 period -2023 and claims that she would only access loans afterwards.

Nadia Calviño, Deputy Prime Minister responsible for the economy, insisted last week that the government had “not at all” ruled out using the loans. Speaking to Spanish radio, she added that Spain’s plans reflect the design of the fund, in which grants are only available during the period 2021-2023, but loans can be disbursed until 2026.

Spain is however concerned about the debt of the State. According to the IMF forecasts, a record budget deficit of 14.1% of gross domestic product this year will lead to a significant increase in debt from 95.5% of GDP last year to 123% for 2020.

Ms Calviño said Spain hopes to start reducing debt as a proportion of GDP next year and is already reducing planned debt issuance. Another senior Spanish official suggested that a final decision on whether or not to activate loans by Spain is several years away, given the window for loans runs to mid-2023.

Portugal initially said last month that it would not use any of the loans amid fears of increased debt levels. However, Lisbon is now open to the idea, saying it will only try to ‘minimize’ loan funding rather than exclude it altogether.

The Italian government, meanwhile, has budgeted all of the € 125 billion in loans it is expected to receive for 2021-26 investments. The Greek government has said it will budget all of its € 32 billion in loans and grants, but an official says it expects the committee to determine how to treat the loans as part of future debt calculations.

Wealthier northern member states that already enjoy ultra-low borrowing costs are likely to avoid lending altogether, diplomats said.

Antoine Bouvet, bond market strategist at ING, said a number of capitals should leverage the loans given the savings they could provide.

“For a government, it is difficult to look to the voters and say we could have spent hundreds of millions more, but we decided that it should be based on interest instead,” he said. declared. “Either it is a substitute for more expensive borrowing, or it is an additional fiscal stimulus that would also be well received by investors.”

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