For all the debt, new bonds from Italy or Spain can be hard to find
AMSTERDAM (Reuters) – Investors could struggle to find new southern European government bonds over the next two years as European Union support programs could cover much of the new needs funding for the countries most affected by the pandemic.
Along with the ongoing bond purchases by the European Central Bank, the net supply of new Italian sovereign bonds in the open market may even decrease.
Grants and loans from the stimulus fund and cash from the so-called SURE unemployment program could cover around 80% of borrowing needs after taking into account repayments in Italy and Spain in 2021 and 2022 and 70% in Portugal, Morgan estimates. Stanley.
“It is indeed a question of providing these countries with levels of financing that they will not need to go and do themselves on the primary market,” said Tony Small, head of the European interest rate strategy for the bank.
Chart: Increase in debt ratios to debt relief thanks to EU grants
A source at Spain’s Economy Ministry told Reuters that SURE funds will begin to affect its borrowing plans from this year and that it expects a “significant” impact on the amount of debt it has to pay. ‘it will sell given the amount of funding available.
While EU funds could directly replace some issues, the ECB’s conventional and pandemic bond purchases would absorb more than the remaining new financing needs.
This could reduce the net supply of Italian government bonds to minus € 60 billion in 2021, Morgan Stanley estimates. The premium Italy pays on 10-year debt relative to Germany could drop 35 basis points to 115 basis points by the end of this year, the bank estimates, with ECB purchases being already expected to create negative net emissions from this year.
In addition, many economists expect the ECB to eventually expand its purchases in the event of a pandemic. Commerzbank expects an extension of 300 billion euros in the second half of 2021, which could bring the net supply of BTP to around 130 billion euros next year, according to the head of rates. and credit research, said Christoph Rieger, which implies much more tightening of the ECB.
MOUNTAIN DEBT BUSINESS
And yet, despite the level of support available, the heavy debt of Italy and Spain will remain much higher than it was before the coronavirus for years to come. Some long-term investors warn against overestimating the size of direct transfers relative to the size of debt build-up.
“The subsidy part is important for Italy … however, that does not change the situation,” said Arnaud-Guilhem Lamy, portfolio manager at BNP Paribas Asset Management, which manages € 428 billion.
In Italy, the subsidies will ease the debt-to-gross domestic product ratio by around 6 percentage points, according to Commerzbank.
But the extent of the damage the Italian economy is suffering from the crisis – with GDP expected to contract 9.5% this year – means the debt ratio is expected to remain high, at 154% of GDP, by 2021, even as the economy begins to recover, another 19 percentage points more than in 2019.
Chart: EU funds could finance most of periphery net issuance
More importantly, EU funds will contribute to debt sustainability by allowing the country to borrow at a much cheaper cost in the long run, BNP’s Lamy said.
Italy currently pays around 1.10% on 10-year debt, while a comparable European bond currently pays around -0.05% EU000A18Z2D4, so that EU loans, even if they will be repaid, involve a significant reduction in borrowing costs.
Lamy increased his overweight position in Italy after the fund was approved, encouraged by the EU’s unprecedented show of solidarity, which bodes well for debt sustainability.
This seems to be the consensus view, with Italian 10-year bonds outperforming Portugal and Greece since the deal, which should benefit from much more significant debt relief.
“The bar for resorting to EU debt in times of trouble has been lowered, and this is more important than the actual funding relief,” said Rieger of Commerzbank.
Reporting by Yoruk Bahceli; edited by Mike Dolan, Larry King