Brisk Italy, Spain borrowing to soothe Fed tapering sting
LONDON, July 19 (Reuters) - Italy and Spain have built up such a head of steam in their 2013 government borrowing that they can afford to ease the pace should a reduction in U.S. monetary stimulus hurt demand for their debt.
More than half way through the year, the euro zone's third and fourth biggest economies have met 80 and 66 percent of their 2013 funding needs respectively. Against a benign backdrop for borrowers, even bailed-out Ireland has nearly funded itself for 2014 as it seeks to fully regain access to debt markets.
The euro zone countries at the forefront of the debt crisis took advantage of an investor scramble for yield earlier in the year as excess central cash in the system crushed returns on top-rated debt. At the same time, a European Central Bank pledge to buy the bonds of countries that sought its help gave investors the confidence to buy lower-rated debt.
Italy, with 2 trillion euros of debt, has met almost 80 percent of its 186 billion euro funding target, according to data compiled by Reuters. It set a brisk pace after resolving a political impasse in March that threatened to scare off investors.
Rome is so far ahead of last year's funding progress that analysts say it can weather any potential rise in longer-term borrowing costs should the U.S. Federal Reserve go ahead with plans to trim its bond purchases later this year.
Spain has met 66 percent of its 121 billion euro funding target, a similar pace to last year. Strategists say strong demand from domestic banks will compensate for any foreign investor reluctance to lend should a ruling party financing scandal worsen.
"They (Italy and Spain) have done their homework and, against this backdrop, it provides them a substantial degree of freedom to adjust and treat each future auction according to prevailing market sentiment," Commerzbank strategist Michael Leister said.
Italy has issued a new 30-year bond and Spain has borrowed over 15 and 10 years.
Italy and Spain have so far been insulated from simmering political tensions at home and from a crisis in bailed-out Portugal largely by the ECB's bond-buying backstop.
Any impact from political problems would first be felt in a rise in long-term borrowing costs, which have already risen off their lowest since 2010 on the prospect of reduced Fed stimulus.
In such a scenario, both Italy and Spain would be more inclined to sell shorter-dated debt, strategists say.
While an over-reliance on short-term bonds creates a problem of having to meet ever-growing repayments and is not favoured by either investors or rating agencies, both countries have bought themselves some wriggle room by issuing longer-term bonds this year, with Italy issuing its first 30-year debt since May 2011.
They could also temporarily cut the size of auctions to ensure demand, as Spain did on Thursday when it sold just over 3 billion euros of bonds, down from the average 4-5 billion offered earlier this year.
"Also, for Spain for instance, even if they continue with auctions of 3.5-4 billion it would be enough to meet their funding target," said RBC strategist Norbert Aul.
Ireland's successful debt sales via syndication have also left it in a good position to cope with any Fed-induced market disturbance should it choose to start auctioning bonds later in the year.
"With the 2013 funding raised so far and the funds available from the EU/IMF aid programme, Ireland will have more than 12 months of pre-funding in place at the end of 2013," Aul said.