(Reuters) – The European Union’s decision to fund lending to Ukraine through borrowing is welcome news to markets, analysts said on Friday, cementing the use of joint debt as a financing solution while avoiding a legally contentious plan to use Russia’s assets.
EU leaders agreed on Friday to borrow cash to lend 90 billion euros ($105 billion) to Ukraine to fund its defence against Russia for the next two years, leaving out Hungary, Slovakia and the Czech Republic.
In doing so, they ditched an unprecedented proposal to use Russian assets, mostly frozen at the Euroclear depository in Belgium.
That plan, opposed by Belgium, had unnerved many in finance who were concerned about the impact on the international standing of the EU and the euro. ECB President Christine Lagarde worried a legally contentious move would have discouraged investors from holding euro assets.
RUSSIA’S ASSETS REMAIN FROZEN
“The chosen solution is the better way in terms of burden sharing,” said Carsten Brzeski, head of global macro at ING.
The EU will leave Russia’s funds frozen until Moscow pays war reparations to Ukraine.
Speaking before the agreement was reached, a senior executive at a large European bank had told Reuters that a “nice middle solution” would be treating the Russian assets “like the family silver”, in which they were left where they were.
The euro was little changed on Friday.
A longer-term benefit from Friday’s agreement is that the new borrowing will add to the perception that joint EU borrowing is becoming a more permanent feature of policymakers’ toolbox, analysts said, a development investors generally support.
“It is no longer taboo to borrow jointly at EU level,” said Andrew Kenningham, chief Europe economist at Capital Economics, even if Germany will likely resist substantial, regular increases.
The EU kicked off large-scale borrowing during COVID-19, but Germany has been particularly reticent about the idea of doing more, signalling that the pandemic programme was an exception.
The bloc has just over 700 billion euros in joint debt outstanding. While new borrowing for the pandemic fund is coming to an end, it decided earlier in 2025 to borrow 150 billion euros in coming years to finance defence loans for member states. More debt to back Ukraine, even if the amount is modest, highlights policymakers may keep tapping that tool where needed.
“I think it’s very important, from a signalling perspective, that they continue to move in that direction,” said Chris Jeffery, head of macro strategy at Britain’s largest asset manager Legal & General, speaking before Friday’s decision.
JOINT BONDS ARE ‘RIGHT INSTRUMENT’
This would reassure markets that the bloc is willing to borrow jointly in the event of future shocks, he added.
Joint bonds “are the right instrument if they are used to finance clearly defined genuinely common purposes,” said Berenberg Chief Economist Holger Schmieding.
In the near term, however, the plan means markets must absorb more borrowing at a time when they already face record funding needs as Germany increases spending.
Euro zone bond yields rose on Friday.
“I don’t know if it’s the best solution from the markets’ perspective, to pile some more supply onto markets when they already have concerns about debt sustainability,” said Royal London Asset Management’s head of rates and cash Craig Inches.
CONCERNS ABOUT THE IMPACT ON THE EURO
Using the Russian cash would have marked the first time that non-belligerent countries seize the assets of a belligerent country in an ongoing war to help a third nation, Sweden’s Riksbank noted in a 2024 paper.
Fitch Ratings had placed Euroclear’s rating on “watch negative” on Tuesday, raising the risk of a downgrade, citing legal risks.
The risk was that central banks with cash in Europe could worry their assets may one day face the same fate as Russia’s, potentially denting policymakers’ ambitions to boost the status of the euro as a reserve currency.
But many investors and analysts said that risks were limited, because it was clear the EU would have been seizing the cash in extraordinary circumstances and after a lengthy process.
