–Weak Euro Means ‘Not Good Moment’ for USD Debt
By Silvia Marchetti
ROME (MaceNews) – Italy plans to issue more short- and medium-term debt in the fourth quarter to cope with surging borrowing costs, and U.S. dollar debt issuance is on hold, according to outgoing ruling coalition sources.
The new debt securities will have 3-, 7-, and 10-year maturities while re-openings of other medium-short term bonds could also be envisaged, sources said.
“With the European Central Bank raising rates and a lower growth expected next year, about 0.6%, accompanied by more public debt, further increases in borrowing costs must be averted,” said an official.
Financing Italian debt has become more expensive with the average interest rate cost of issuance now at 1.31%, up from 0.10% last year. Italy’s recent elections won by a hard-right coalition are destabilizing markets as policy uncertainty has pushed the spread in yield between Italian and German bonds to 245 basis points.
Weeks will pass before a new cabinet takes over, further increasing financial uncertainty.
Rising borrowing costs are topped by the penalizing euro-dollar exchange rate, which is pushing Rome to revisit previous funding plans aimed at issuing more USD-denominated bonds this year.
“While before the euro’s strength comfortably allowed us to support debt costs in USD, at the moment, with the single currency having fallen well below parity with the US dollar, placing new securities in USD is not convenient,” said a source.
“Months ago we feared the consequences of what would happen when we were nearing the euro-dollar parity, which seemed almost impossible given it had never happened in 20 years, and now the euro is the weak currency,” the source said.
Officials however are keen to stress that even though new USD-denominated bonds are “currently on hold,” were market conditions to change and go back to being favorable, new financial operations on the US market would be undertaken.
“It’s just a really bad moment right now but we will … remain on the US financial market. We have, after all, already launched several US-denominated issuances in the past years, with the goal to complete the yield curve and strengthen our presence and role of frequent issuers,” said another official.
“Since 2019, when Italy made an historical comeback on the US market after 10 years of absence, all placements have been successful. So far we’ve raised total USD 20 billion, and we see that there has been growing appetite in the US for Italian bonds.”
Sources said debt issuance in foreign currencies need to always monitor the market to exploit the opportunities stemming from momentary misalignments of the euro and dollar curves, which is currently in favor of the USD and penalizes the euro.
“Who knows, this scenario could change by year-end and a new USD-denominated issuance could still take place, but perhaps it would more likely be possible next year,” added an official.
If by December no new USD-denominated issuances were to take place, Italy would have skipped a quarter of USD issuance year for the first time since 2019. This would contrast with funding plans laid out at the start of 2022 which mentioned new operations on the US market.
According to government data, since the start of the year a total EUR 210 billion worth medium- and long term debt has been issued, while EUR 64 billion is still to be issued by year-end.
Italy has also received some EUR 11 billion in direct pandemic aid from the European Union, and will be getting another EUR 20 billion in the next few months, “helpful money” which eases the pressure on more issuance needs, noted an official.