G7 finance ministers consider plan to issue debt secured by frozen assets

Good morning from Florence, where the annual State of the Union address is taking place at the European University Institute.

Today, correspondents at the G7 Finance Ministers' Meeting will provide an overview of discussions on plans to use Russian assets on the behalf of Ukraine, and I will report on the Polish and Greek proposal for a joint EU air defense shield.

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G7 finance ministers met on the shores of Lake Maggiore in Italy to discuss leveraging the benefits of Russia's frozen reserves for Ukraine. write Paola Tama and Claire Jones.

Background: The United States is pushing for a bond issue backed by the future value of profits from Russian reserves frozen by Western sanctions. G7 EU member states and Japan are open to the plan as a way to secure support for Kiev ahead of November's US elections.

U.S. Treasury Secretary Janet Yellen told the Financial Times in an interview that she expected finance ministers to support the idea.

“If there is broad support for this general approach as constructive, then we will work through some important details in the coming weeks,” Yellen said. G7 leaders are due to meet in mid-June where they could hammer out a final deal.

But key details have yet to be worked out, the officials said, including who would issue the debt (the U.S. alone or the G7), how it would be secured (a sovereign guarantee or backed by assets) and how it would be repaid if future benefits don't materialize.

Yellen acknowledged that not everything was clear yet, including where the money would go, but said it was unlikely to go directly to Ukraine and would likely go to a European facility or the World Bank before being transferred to Kiev.

The amount and even the timeline are still unclear and depend largely on interest rate movements. The U.S. has said the plan could see $50 billion paid to Ukraine by the summer.

European officials are also skeptical that the plan can be issued before the autumn, as it would require unanimous support from all EU member states.

“It's not easy, central banks are hesitant,” said Italian Finance Minister Giancarlo Giorgetti. “But we have to try hard and be inventive,” he added.

The mood in Stresa was generally optimistic, with consensus on the need to mobilize funds for Ukraine. “It is important to understand that Russia will not give up on helping Ukraine because of a lack of resources,” Yellen said in her speech.

Today's Chart: Shrinking

Births in the EU are set to fall to levels forecasters had not expected for the next two decades, suggesting Europe's population could peak next year.

EU “Iron Dome”

The prime ministers of Poland and Greece called on the EU to develop and fund a common “European air defence shield”.

Background: Russia's full-scale invasion of Ukraine has sparked a major shift in EU thinking about defence, including EU funding for weapons sent to Kiev, joint funding of European defence projects and talks on how to better integrate military platforms.

In a letter to European Commission President Ursula von der Leyen, seen yesterday by the Financial Times, Polish Prime Minister Donald Tusk and Greek Prime Minister Kyriakos Mitsotakis called for a “comprehensive air defence system to protect the EU's common airspace against all threats”.

With Russia bombing Ukrainian towns, cities and critical infrastructure daily, air defense against bombs, missiles and aircraft is a key requirement for military planners, but the systems are expensive, time-consuming to build and few EU countries have them in sufficient quantities.

The two leaders described the lack of coordinated air defence as “a major vulnerability in our security” and said such a project would “send a clear signal that Europe is united and determined to act in self-defence.”

“In this new geopolitical era, our economic and monetary union must be accompanied by a strong defense union,” they wrote.

“I would, for example, propose an air defence shield as a common European project,” von der Leyen, who is running for a second term in the presidency, said at a European election leaders' debate hosted by the Financial Times/Bruegel on Tuesday.

Tusk and Mitsotakis suggested the proposal should be discussed at a summit of EU leaders next month.

What to see today

1. The NATO Congress opens in Sofia, Bulgaria.

2. The European Union's top diplomat, Josep Borrell, will speak at the State of the Union in Florence at 3:45 p.m.

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