ECB sets up Italy for bounce in debt maturity

18/04/2015 01:03 AST

Italy is likely to increase the average life of its debt this year for the first time since 2010 as European Central Bank bond purchases push yield-hungry investors towards riskier long-term debt.

In a long-awaited turnaround of a trend that began during the eurozone debt crisis – when Italy could only sell short-dated bonds – the average maturity of Italian debt could rise to 6.6 years in 2015 from 6.4 last year, UniCredit estimates.

That would bring it into line with the average for the Group of Seven richest economies, currently 6.7 years, the bank said.

Yesterday’s exchange of nearly €1.7bn of 2025 bonds for debt maturing in 2016 and 2017 is a step in that direction.

Pushing debt repayments far into the future gives countries more financing flexibility during economic downturns, when cash and appetite for riskier assets is scarce.

For countries such as Italy, one of the world’s most indebted nations, such flexibility is more important than for those like Germany, whose top-rated bonds are even more sought after in bad economic times.

“For Italy it’s important to do what they’re doing right now because they’re by far the most indebted country in Europe,” said Vincent Juvyns, global market strategist at JPMorgan Asset Management. “It makes it more stable. If I were at the Treasury at this moment, I would do the same.”

Italy’s debt was a record 132% of gross domestic product at the end of 2014 and is forecast to rise slightly this year before beginning to fall.

At the height of the eurozone crisis in 2011 and 2012 Rome became reliant on short-term debt as medium- and long-term borrowing costs of more than 7% were deemed unaffordable and unsustainable.

That means Italy has to repay debt worth close to €200bn in each of 2015, 2016 and 2017. But the ECB is making the task easier.

Its trillion euro bond-buying programme has pushed yields on over a third of outstanding eurozone debt into negative territory, leading investors to buy lower-rated and longer-dated debt to maximise returns. That increase in demand has allowed Italy to issue about €20bn in 15- and 30-year debt this year, with more long-term debt sales likely in coming months.

“One of the main consequences of the ECB’s monetary policy stance ... has been the increase in investors’ appetite for longer maturities,” said UniCredit strategist Chiara Cremonesi.

“This has created an incentive for issuers to lengthen the average maturity of their issuance and, as a consequence, of their debt as a whole.”

Bringing the average maturity of Italy’s debt back to 2010 levels of 7.2 years is likely to be a slow process and it will take years before the sustainability of its €2tn debt burden improves significantly.

Spain, which like Italy is rated in the lowest investment grade triple-B bracket, has increased the average maturity of its annual issuance, from 5.1 years in 2012 to 7.6 years in 2013 and 8.5 years in 2014. But the average life of its debt only turned around last year, rising to 6.28 years from 6.2 years.

Madrid expects it to lengthen to 6.50 years this year, still below a pre-crisis peak of more than 6.8 years in 2007.

“Obviously these countries have to keep issuing a certain amount in each maturity. What they can try to do is to increase the amount of 30-year and decrease the amount of three- and five-years,” said Gianluca Ziglio at Sunrise Brokers.

“Does this materially change things? I don’t think so, but it makes it more manageable going forward.”

Reuters