BYoruk Bahceli, y Dhara Ranasinghe
LONDON, July 21st (Reuters) – Italy is once again in market spotlight because of its debt-laden status. A collapse in Italy’s national unity government coincides as the European Central Bank prepares to raise its first interest rates in 11 years.
Italy is like other euro zone countries that are indebted and have spent the last few decades trying to decrease its vulnerability to rising rates of market panic.
A Reuters review of the company’s debt profile revealed that it is more susceptible to rising borrowing costs.
Investors are already worried about the impact of the end to Prime Minister Mario Draghi’s government, early elections and how much more borrowing costs this second-most indebted state in the euro zone can handle.
Premium investors prefer Italian bonds to top-rated Germany. This is a sign of market concern. On Thursday, the rate of increase was almost 245 basis point.
Italy’s government collapsed Wednesday after Draghi’s coalition partners turned down a confidence vote. He had asked for it to end divisions and to renew their fractured alliance.
Italy’s debt maturities have been extended by certain measures, but it is less than its Southern European counterparts. Also, the country’s total debt is higher that it was during the crisis in eurozone debt.
Bethany Payne (Janus Henderson portfolio manager) said, “Italy still hasn’t caught-up yet to precrises levels and remains relatively vulnerable.” She said that Italian debt sustainability was even more prescient because of political instability and the ECB’s increasing rates.
Average life expectancy of Italian debt at seven years is less than it was in 2010. It is also only slightly lower than the average life expectancy in 2012, when the eurozone emerged from a debt crisis.
However, the average maturity spanish debt is now just over eight years after being 6.35 years in 2012. According to data from the debt agency, Portugal’s average maturity has increased to 7 years, up from 6 years in 2012.
Janus Henderson estimates that Italy has fallen behind in funding its debt this year. Only 52% of the debt was issued by June’s end, while 68% were done at the same time last year. It will therefore borrow at higher rates than the market.
Davide Iacovoni (italian head of debt management) stated last month that the Treasury had the financial firepower and flexibility needed to overcome volatility in the market.
He said that while no one can be content at this time, it was manageable considering all the tools at our disposal, which included 80.2 billion euros in liquidity at May’s end.
The ECB will likely raise rates on Thursday to tame record-high inflation and, crucially, for Italy, to outline a new tool that can limit bond market stress.
At 3.59%, Italy’s 10-year debt costs have risen some 200 bps by 2022 IT10YT=RRThey rose by roughly 4% in 2011, according to analysts. Investors think 4% is the threshold at which panic sets in. The ECB acted after that was broken.
Rising yields make it more costly to service Italy’s debt. According to the Bank of Italy, that debt pile reached a record of 2.759 trillion euros in April.
Italy remains a wealthy country. Its household net financial wealth is approximately 10 trillion euros. But the problem is refinancing risk as more debt becomes due.
The country appears vulnerable to peers because its bond issuance tilts towards shorter maturities. It has 35% of its outstanding loans due by end-2024.
Spain will repay approximately 25% of its outstanding debts by the end of 2024 and Portugal around 20%.
“Just looking at the seven years (in Italy) does not take into account the fact that there are T-Bills, sub-two-year and other debts that make up a significant portion of total stock,” explained Chris Jeffery of LGIM, head of rates and inflation strategy. Jeffery is also underweight for peripheral eurozone bonds.
Investors should note that while Italy’s average maturity is seven years, its median maturity, which is the point at which half of its debt becomes due, is approximately five years.
According to some estimates, this point could even be sooner if you account for central bank bond purchase.
Even if there is no immediate debt, rising yields have an impact on banks, borrowing costs for businesses and households, and “getting into the bloodstream of the economy”, Richard McGuire, Rabobank head of rates strategy.
He stated that the optimistic idea of a seven year weighted average maturity of Italian debt (debt), clearly did not help to alleviate these concerns. Therefore, the ECB had to intervene last month.
Spread the yield on Italian bondshttps://tmsnrt.rs/3IRrXVK
It is too big for Italy to fail, and it hasn’t grown in 20 yearshttps://tmsnrt.rs/3AOiGf1
(Reporting by Dhararanasinghe & Yoruk Bhceli; additional reporting from Sujata Rao, London and Belen Carreno, Madrid; Editing done by Tommy Reggiori Wilkes
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