—More retail, green bonds to come
—Foreign markets not key at present
By Silvia Marchetti
ROME (MaceNews) – Rome’s rightist government is keeping new issuance of USD-denominated bonds on hold in 2024 for a third consecutive year in light of higher yields and the euro’s weakness, according to ruling coalition sources.
Italy is less keen to focus on issuance in other currencies as geopolitical tensions and the European Central Bank’s rate increases have raised debt costs, argue officials.
“Foreign markets are not at the moment at the cornerstone of our issuance strategy — however, we will keep monitoring market conditions and the USD-EUR curve to evaluate whether there are any opportunities to launch new USD-denominated bonds,” said an official.
“There is too much USD-EUR exchange rate misalignment and distances between the monetary policies being carried out by the Federal Reserve and the ECB to concentrate too much energy on defining the placement of more securities on the US market,” the official said.
Rome’s cabinet is refining its 2024 issuance program. According to sources, the government expects total gross issuance of debt securities for about EUR 500 billion euros next year, including almost EUR 360 billion of medium-long term bonds and roughly EUR 150 billion of T-bills.
The planned medium-long term issuance is in line with the volume issued this year but would be below the 2022 funding target which stood at EUR 400, mainly due to higher pandemic deficit spending.
Of these EUR 360 billion medium-long term bonds for next year, roughly EUR 150 billion will meet government borrowing requirements as per the recently approved budget plan, while the remaining will go into the re-opening of existing securities and the launch of new ones.
In recent years, Italy has participated in international markets through bond issuances placed via its Global Bond channel (reserved for investors of high institutional profile in different geographical areas) in a bid to attract institutional investors, mainly American and Asian.
However, warn coalition sources, the faster pace of rate hikes by the Federal Reserve compared with the ECB has strongly contributed to the weakness of the euro-dollar exchange rate, making dollar issuance more expensive than in domestic currency.
“Therefore, in the last two years we have deemed it not appropriate to carry out financing operations on international markets, and this is where we stand right now. For next year, more USD-denominated, or other currency issuances, will be subject to the return of more favorable market conditions,” the official said.
Since 2019 when it made a historic comeback to the US market after a 10-year absence, Italy has launched several US-denominated issuances raising a total EUR 20 billion, with the goal to diversify the investors’ base, complete the USD-EUR yield curve and strengthen its role of frequent issuer.
But the path has changed since premier Giorgia Meloni rose to power in September 2022.
Now the rightist nationalist cabinet eyes what it calls other, “safer” plans.
“We will focus our 2024 issuance strategy on the gradual reduction of issuance in the short end of the yield curve with more long term bonds to reduce exposure to rising interest rates and refinancing risks,” said another official from the co-ruling League Party.
“We’re trying at this very delicate moment, with two key wars waging in Ukraine and in the Middle East, to keep our issuances as domestic as possible. That’s why there are plans next year to issue more retail bonds specifically directed at families and workers, and also more green bonds for sustainable investments in ecological transition, which have so far raised a total EUR13.5 billion,” said the League source.
Given how the placement of retail bonds were a huge success in 2023 among Italians, with an overall raised amount of EUR 35 billion in just two operations, the rightist government prefers to “bet on a winning tool,” as officials define it, rather than venture again onto “unsafe” US ground.
In 2022 the government had already pressed pause on issuing more bonds in USD given the weak euro-dollar exchange rate.
Sources say the instability of USD-EUR exchange rate curve called for “utmost caution”, stressing however that the door always remained open.
“Of all foreign markets, our interest is always primarily on the US one, where in the last few years international investors, not just American ones, purchased our bonds,” said a ruling coalition source.
But the “American front”, argued a Democrat opposition deputy, which had been at the core of the previous center-left government debt strategy, seems to have been dropped by Premier Meloni, who is pushing for “the nationalization of public debt to remain as much as possible within our backyard, in the hands of Italian savers,” the deputy said.
The Democrat warned that Meloni’s decision to fund half of next year’s budget plan with EUR 16 billion in deficit spending, rather than pursuing spending cuts, was surely not helping to lure foreign investors into Italian bonds.
Even though government officials show little interest in foreign debt sales for next year, they prefer to remain vague and open to the chance that the outlook could change.
“Throughout 2024 we will continue to monitor US market trends but we need more favorable cost conditions. The euro is still too weak to make it convenient for us,” the first official said.
Officials say they are confident that demand for USD-denominated Italian bonds will not waver, but to return to the US market Rome needs a “significant, advantageous realignment” of the euro and dollar yield curve.
There’s also another issue at stake which complicates the scenario. Despite promises to cut public debt, set to rise over 140 percent of GDP next year, Italy’s average debt duration continues to hover above 7 years, increasing funding costs.
Cabinet officials, of course, blame the ECB for this.
“The average cost at issuance, at the end of the 2023, consistently with a global rising interest rates scenario, was 3.76%, as opposed to 1.71% in 2022 and 0.10% in 2021. And this is clearly due to the imprudent ECB rate policy and unclear communication,” said an official.