—Higher debt costs ‘not an issue’
—Funding targets in line with plans
By Silvia Marchetti
ROME (MaceNews) – In this third quarter Italy will be focusing on issuing new medium-long term securities in a bid to lure more domestic investors, said sources, who downplayed any risks of higher debt costs tied to monetary policy easing.
“We’ve lately seen a great appeal of these bonds among domestic retail and institutional investors which encourages us to continue along this path”, said a ruling coalition official.
According to Rome’s government that has carried out several surveys, longer maturities appeal to Italian families as they tend to have lots of savings they prefer to invest in long term investments, and trust the state to hold their money more than banks.
In coming months new tranches of 5 and 10-year, and possibly even longer, securities will be issued, while medium-long outstanding ones will be re-opened.
Sources said that as the focus remains on the domestic market, it is very unlikely that issuances of bonds in foreign currency, including in USD, will take place any time soon. They stressed that there currently is no prospect of a return to the U.S. market.
“Well, actually it is more likely that this centre-right government, for the entire duration of its mandate, will not be placing any new USD denominated bonds unless the euro-dollar curve bends in favor of the euro, making it appealing for us”, added the official.
“Currently, the exchange rate is far from being favorable, and this also impacts on US-EU trade”.
Rome’ government, led by premier Giorgia Meloni, has pressed pause on issuance of USD denominated bonds for a third consecutive year, saying market conditions aren’t favorable and she’ll be waiting for a better scenario.
The third quarter issuance program envisages profitable rates for investors, ranging between 3.5 and 3.8 percent, which sources define as “historically and extraordinarily appealing for they have never been so high”.
Officials noted that funding targets for this year are in line with plans previously defined by the cabinet.
So far, Rome has issued medium-long term bonds for a total nominal amount of around EUR 186 billion. While for the remainder of the year, till the end of December, medium-long bonds for a total amount equal to EUR 139 billion will be issued.
“Italy’s public debt average is currently 7.03 years, slightly higher compared to five months ago when it stood 6.97. By slowly extending the average life of our debt, we will make it more sustainable in the long run and less subject to market fluctuations”, said another government official.
However, extending the life of public depth also means having to deal with an increase in interest rates, but officials are confident that the current monetary and economic scenario will offset any potential risks to financial stability.
Even though the average cost at issuance at the end of May was 3.59%, slightly lower than 3.76% in December, officials are bracing themselves for a rise in coming months.
“It is quite obvious that this year an increase in interest expenditure is expected, compared to 2023, due to the European Central Bank’s monetary policy tightening, which has led to a significant increase in government bond yields”, said an official.
“The era of zero rates is over, which means that the cost of lending is now increasing as the ECB slims down the amount of Italian bonds it purchases, until it will eventually phase out”.
—However, sources believe that several factors will help mitigate potential risks, including the normalization of the inflation rate that reduces the index-linked securities interest component, and the ECB’s monetary policy decisions regarding cuts in the policy interest rates.
“After June’s rate cut, global markets are already pricing in possible further cuts in the next ECB meetings, so any further cut is no news, or at the very least it won’t trigger havoc anymore. Those days are gone”, said an official.
Sources expressed optimism in Italy’s economic performance for the second half of the year, supported by a deceleration in inflation, and the easing of financing conditions linked to the normalization of monetary policy by the ECB.
“All these factors are expected to support investments and growth, and allow us to meet fiscal targets and consolidate debt reduction”, said one official.
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