Series Viewpoint Compromise Reached! Mission Accomplished? 10th April 2020 Fabrizio Pagani, Global Head of Economics and Capital Markets The below is an update to our previously published opinion piece titled Strategy "A Spectre is Haunting Europe: Debt Mutualisation," published on April 6th 2020. Fabrizio joined Muzinich in June 2018. Prior to that he was in the public sector where he The Eurogroup met on the evening of Tuesday, April 7th, and after a has held a number of roles including most night-long negotiation which didn’t lead to an agreement, reconvened recently Head of the Office of ’s on Thursday, April 9th. Eventually, the gridlock was broken and a Minister of Finance, responsible for common position on a comprehensive package of measures was developing policies targeting reached. macroeconomics, tax, finance and banking. Before that he served as Sherpa and Here are the four main elements of the package¹: Senior Economic Counsellor to the Italian prime minister. Previously, during his time at 1) A temporary -based instrument called SURE (Support to mitigate the OECD in Paris, he also held the role of Unemployment Risks in an Emergency) was agreed upon. SURE will seek Chief of the Sherpa Office and Special to support EU member states in protecting employment through Counsellor to the Secretary General in Paris, favourable-term up to €100bn, building on the responsible for coordinating the OECD’s (EU) budget as much as possible and on guarantees from the member contributions to the G20 and G8 during and states; after the financial crisis. He holds a degree in International Affairs from the Scuola S. 2) The European Investment Bank (EIB) will create a guarantee fund of Anna in Pisa and a Masters in International €25bn to provide guarantees to loans up to €200bn (a 8X multiplier is and European Law from the European standard EIB practice) to support companies, particularly Small and University Institute. Medium Enterprises (SMEs). The EIB programme will complement the wide loan guarantee schemes provided at the national level to ensure liquidity in the economy; 3) On the European Stability Mechanism (ESM), it was decided that, through the so-called Enhanced Conditions Credit Line scheme (ECCL), the ESM will support financing for a benchmark amount of 2% of member states’ current GDP. The only conditionality is that this credit line will be used for “financing of direct and indirect healthcare, cure and prevention related costs due to the COVID-19 crisis”;

1 2020-04-10-4336 4) On the most “mutualistic” proposal related to the creation of common debt instruments, progress was limited. There was somehow agreement to disagree on key elements of an ad hoc “Recovery Fund”, i.e. on its relation to the EU budget, its financing sources, or its innovative financial instruments. The decision on how to proceed is being sent up to European Leaders, who will meet on April 23rd. The first two measures of the package, the SURE and the EIB guarantee scheme, were not particularly controversial and were broadly agreed in advance. The focus of the 16-hour negotiations was indeed on the use of the ESM and on the Recovery Fund as well as on their interplay. In our view, the results are an “honest” agreement which helps and moves the posts of the discussion further ahead. However, we believe some aspects of it are a bit disconcerting: The ESM could become an “Achilles and the tortoise” paradox, in which the southern countries which have been asking for relaxing the conditionality elements of the ESM credit line have broadly obtained what they asked for, but they could end up never using it for reasons of domestic policy. The ESM “stigma” seems at the moment unsurmountable; The negotiations on a “Recovery Fund” can be compared to a reverse “Penelope’s web”, in which the gap between those who want a common debt instrument and those who oppose it widens during the day, when Parliaments are working, and narrows at night, during the negotiations. We believe that to construe such an instrument may take time, well beyond the next meeting. Perhaps the upcoming heavyweight EU Presidencies of (second half of 2020) and (first half of 2021) will help to complete the web. In the meantime, the European will continue to guard on the safety of the and we believe markets have taken note of that.

1.Source: European Council as of April 9, 2020. https://www.consilium.europa.eu/en/press/press- releases/2020/04/09/report-on-the-comprehensive- economic-policy-response-to-the-covid-19-pandemic/

2 2020-04-10-4336 Important Information "Muzinich & Co.", “Muzinich” and/or the "Firm" referenced herein is defined as Muzinich & Co., Inc. and its affiliates. This document has been produced for information purposes only and is not intended to constitute an offering, advice or recommendation to purchase any securities or other financial instruments. The investment strategies and themes discussed herein may not be suitable for depending on their specific investment objectives and financial situation. Investors should conduct their own analysis and consult with their own legal, accounting, tax and other advisers in order to independently assess the merits of an investment. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only, are as of the date of publication and are subject to change without reference or notification. Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or the actual performance of the securities, investments or strategies discussed may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this document may be relied upon as a guarantee, promise, assurance or a representation as to the future. All information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. Nothing contained herein is intended to constitute investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Historic market trends and performance are not reliable indicators of actual future market behaviour or performance. Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich & Co., Inc.; its accuracy or completeness cannot be guaranteed. No part of this material may be reproduced in any form or referred to in any other publication without express written permission from Muzinich. Issued in Europe by Muzinich & Co. Limited, which is authorised and regulated by the Financial Conduct Authority FRN: 192261. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ. Muzinich & Co. Limited is a subsidiary of Muzinich & Co., Inc. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

www.muzinich.com www.muzinichprivatedebt.com [email protected]

New York London Dublin Frankfurt Madrid Manchester Milan Paris Singapore Zurich