|
Like other indebted euro zone countries, Italy has spent the
past few years when cash was cheap and plentiful trying to
reduce its vulnerability to rising rates and market panic.
But it is more exposed to increasing borrowing costs than it
might appear, according to a Reuters review of its debt profile.
Investors are already fretting about what a possible end to
Prime Minister Mario Draghi's government and early elections
mean, and how much of a surge in borrowing costs the second most
indebted euro zone state can handle.
The premium investors' demand to hold Italian bonds over
top-rated Germany, a key gauge of market concern, is back above
200 basis points after Draghi last week tendered his
resignation. Italy's president rejected that but on Wednesday
Draghi demanded unity among his coalition partners if they
wanted him to stay in office.
A vote on his speech is expected by 1730 GMT.
GRAPHIC: Italian bond yield spread
https://graphics.reuters.com/
EUROZONE-MARKETS/ECB/
mypmnlxnevr/chart.png
For sure, Italy has extended its debt maturities, but by less
than Southern European peers and outright debt is higher than it
was during the euro zone debt crisis.
"Italy hasn't caught up yet to pre-crises levels and still
remains relatively vulnerable," said Janus Henderson portfolio
manager Bethany Payne. "Italian debt sustainability is even more
prescient due to political instability and the ECB hiking
rates," she added.
At around seven years, the average life of Italian debt is lower
than it was in 2010 and only marginally higher than in 2012 when
the euro zone emerged from a debt crisis.
But the average maturity of Spanish debt has risen to just over
eight years from 6.35 years in 2012. In Portugal, it has risen
to around seven years from just under six, debt agency data
shows.
Italy is also behind on its funding this year, only completing
52% of debt issuance by the end of June versus 68% at the same
point last year, Janus Henderson estimates. That means Italy
will be borrowing at higher market rates.
GRAPHIC: Italy is too big to fail and hasn't grown for 20 years
https://fingfx.thomsonreuters.com/
gfx/mkt/zjvqkzwnqvx/Italy%20is%20too%20big%20to%20fail%20and%20has%20been%20stuck%20for%2020%20years.png
However, Italy's head of debt management, Davide Iacovoni, said
last month that the Treasury has the flexibility and financial
firepower needed to overcome market volatility.
"Nobody can be comfortable at a time like this, but it is a
manageable situation, considering the whole toolbox at our
disposal, including 80.2 billion (euros) in liquidity at the end
of May," he told a newspaper.
SHORT TILT
On Thursday, the ECB is expected to hike rates to tame record
high inflation, and crucially for Italy, to detail a new tool to
contain bond market stress.
At 3.31%, Italy's 10-year borrowing costs have surged some 200
bps in 2022, roughly how much they soared in 2011. Investors say
4% is the level where panic sets in. That was breached last
month, prompting the ECB to act.
Rising yields increase the cost of servicing Italy's debt. That
debt pile rose to a record 2.759 trillion euros in April,
according to the Bank of Italy.
Italy remains a very wealthy country - household net financial
wealth is an estimated 10 trillion euros - but the problem is
refinancing risks as debt comes due.
The country looks vulnerable versus peers because its bond
issuance is tilted towards shorter maturities, with 35% of its
outstanding debt due by end-2024.
Spain will refinance about 25% of its outstanding debt by
end-2024, and Portugal, around 20%.
"Just looking at the seven-year point (in Italy) misses the fact
that you have T-Bills and sub-two year debt that is a very large
portion of the total stock," said LGIM'S head of rates and
inflation strategy Chris Jeffery, who is underweight peripheral
euro zone bonds.
While the average maturity of Italy's debt is around seven
years, its median maturity - the point when half its outstanding
debt comes due - is in around five years, investors note.
That point could be even earlier after accounting for central
bank bond purchases, according to some estimates.
Even if debt is not due immediately, rising yields impact banks
and borrowing costs for firms and households instantly by
"getting into the economy's bloodstream", notes Rabobank's head
of rates strategy, Richard McGuire.
"The optimistic notion of a seven-year weighted average maturity
of Italian (debt) clearly did nothing to assuage these concerns,
hence the ECB needed to step in last month," he said.
(Reporting by Dhara Ranasinghe and Yoruk Bahceli; additional
reporting by Sujata Rao in London and Belen Carreno in Madrid;
Editing by Tommy Reggiori Wilkes)
[© 2022 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.
|
|
