he EU's shadow borrowing has continued to increase, and rapidly.
That is the message given by this high-level update by Bob Lyddon, international banking expert and author of 'The shadow liabilities of EU Member States, and the threat they pose to global financial stability', which was published by The Bruges Group in 2023 and used year-end 2021 figures as its basis:
http://www.lyddonconsulting.com/wp-content/uploads/2025/02/EU-shadow-debts-update-as-of-25jan25.pdf
The total of shadow liabilities – meaning the combination of shadow debts and contingent liabilities -has fallen to 65.7% of EU GDP from 70.4% in 2021, but the debt component has risen from 44.1% of EU GDP to 48.2%, because of the increase in schemes like InvestEU and because of Next-Generation EU. The money borrowed under these schemes has simply been spent, which has flattered the performance of the EU economy.
The fall is entirely attributable to contingent liabilities.
In 2021 the EU's authorised-but-undrawn borrowings for Next-Generation EU counted as a contingent liability, but have switched to being real debts as the programme was drawn down.
The other main fall in contingent liabilities derives from a reduction in monetary policy support from the European Central Bank ECB): for example, its loan scheme to commercial banks – called Targeted Longer-Term Refinancing Operation Series 3 – expired and was not renewed, eliminating €440 billion of credit risk.
This overall fall in contingent liabilities disguises the changed nature of one component within them: the €826 billion risk-of-loss on the ECB's Asset Purchase Programmes and the Pandemic Emergency Purchase Programme. In 2021 it was a risk-of-loss if interest rates rose 2%. They duly have done, causing the market value of the bonds held in these programmes to fall. The loss remains a 'contingent liability' but contingent only on the bonds not being sold. In 2021 it was contingent on the loss not occurring and then on the bonds not being sold.
If they were sold, the ECB would bear the loss and be bankrupted by it - its capital is only €9 billion.
In that case the EU's national central banks – the other members of the Eurosystem – would have to recapitalise the ECB, and with funds from their owners, the member states. The member states have no surplus funds as they are mainly running fiscal deficits. The funds would have to be borrowed, causing a further breach of the Maastricht Treaty, and translating the loss into an increase in member states' General Government Gross Debt. That must be avoided, and the loss must remain concealed within 'shadow liabilities' and preferably as a 'contingent liability'. The Eurosystem will hold its bonds until their maturity to continue with this submersion.
This is the same type of loss that the Bank of England has sustained under its Asset Purchase Programme (or Quantitative Easing). However, the Bank of England's approach has been exactly what the EU wishes to avoid: to sell off its bonds, make a major loss and reclaim the loss from HM Treasury, forcing HM Treasury to borrow, add to the UK's national debt and make the UK's Debt-to-GDP ratio worse.
