Spain and Italy are grabbing a historic opportunity to lengthen the average life of their debt and pull themselves out of a dangerous spiral of short-term refinancing obligations.
Both countries have said they plan to issue longer-term debt, taking advantage of a revival in appetite for such high-yielding bonds to free themselves from the treadmill of keeping up with frequent repayment deadlines.
Even now, more than 40 per cent of Spanish debt expires in the next three years and a similar chunk of Italian debt comes duein the next four years, Reuters calculations show.
But if they can tap into renewed investor interest and keep selling long-dated bonds, they can fundamentally improve their financing position, which had investors so leery in 2011 and 2012 that many outside the eurozone predicted the bloc’s imminent fracture.
Signs of economic recovery this year and central bank safety nets introduced to tame the crisis, which erupted in Greece in 2010 and spread to the region’s other highly indebted nations, have helped bring down both Italian and Spanish 10-year borrowing costs by about half a percentage point so far this year.
Falling overall financing costs argue for longer maturities to be issued. The total average interest rate Spain paid on its debt was 3.73 per cent at the end of 2013, down from 4.07 per cent in 2011, according to Treasury data.
Spain can now sell nine-year bonds at its average rate of funding, whereas late in 2011 it could not even sell three-year bonds at the then average rate.
Italy sold bonds in 2013 of an average maturity of 7.6 years and an average cost of 3.61 per cent – the current cost of nine-year bonds, according to Reuters and Commerzbank data.
“Increasing it (the average life of debt) must be the biggest theme of the year for Italy and Spain,” said David Schnautz, rate strategist at Commerzbank in New York.
“It’s a very realistic plan. Pension funds and others have nominal yield targets and stepping down the credit spectrum is the lesser of many evils for them. Looking at what Germany offers, you can double that with (Spanish and Italian bonds).”
Spain can now sell nine-year bonds at its average rate of funding
But while growth holds down the debt burden relative to gross domestic product, both countries remain acutely vulnerable to shifts in sentiment with debt loads of 0.9 and 1.3 times economic output in Spain and Italy respectively.
At the end of 2013, the average maturity of Spanish and Italian debt was 6.2 and 6.44 years, respectively – both their shortest since 2004 and off highs of 6.82 and 7.2 years.
“As the crisis wanes and the fiscal situation improves, they still have to issue a lot [of bonds], not because of a high [budget] deficit, but because of high redemptions,” said Gianluca Ziglio, an analyst at Sunrise Brokers.
“This makes the bonds less attractive... If issuance shifts towards longer maturities, investors would have to ask a premium for it.”
He added though that a major reversal of the falling trend in bond yields was not necessarily on the cards. Only another dip into recession or a political crisis could cause that.
In the future, investors would actually consider a longer life of overall debt an appealing feature of those markets.
Spanish 10-year borrowing costs trade at their lowest in about four years at around 3.75 per cent and not far from euro era lows. Italy’s debt costs are back to 3.85 per cent.
Their 15- and 30-year bond yields are also at, or close to, multi-year lows, and just over half what two-year yields were at their crisis peaks.
In its 2014 strategy, the Spanish Treasury said its aim was to at least stabilise the average maturity of its debt. Maria Cannata, the head of Italy’s debt agency, has repeatedly said she will try to increase the debt’s lifespan if she can.
Both sovereigns are already making progress. By this time last year, the longest-dated debt Italy had sold was about €500 million of a 2022 bond. This year, its longest tap was a 2028 bond for €1.695 billion.
Spain this year has already sold about five billion in 2026 and 2028 bonds and analysts expect a syndicated deal for a bond maturing in at least 10 years to be scheduled soon. By this time last year, the longest bond it sold was a €7 billion, 10-year through a syndicate of banks.
Sandra Holdsworth, investment manager at Kames Capital, is one of the investors who has recently increased the overall maturity of Spanish and Italian bond holdings.