LONDON Oct 4 The possibility of more cheap
loans to banks, recently flagged by the European Central Bank,
has had little impact on money market rates and the euro but is
reassuring investors about the euro zone's 2014 funding
Citi projects gross euro zone issuance will rise 14 billion
euros next year to 864 billion euros and Italy will see the
largest increase in issuance in the euro zone next year, some
Even though Prime Minister Enrico Letta won a confidence
vote this week, analysts say that political uncertainty could
still weigh on appetite for Italian debt next year.
However, an improvement in the euro zone economy and the
possibility of more ECB support is expected to provide a
favourable backdrop for the increase in issuance in the currency
bloc, offsetting any rise in financing costs from a reduction in
Confidence in most euro zone states' ability to easily fund
themselves in secondary markets in 2014 is in sharp contrast to
recent years, when soaring yields risked shutting Italy and
Spain - the euro zone's third and fourth-largest economies - out
"(We) expect a two-year LTRO (long-term refinancing
operation) to be announced by early 2014. All things being
equal, this should be supportive at least for issuers such as
Italy which will have more issuance in 2014 than 2013," Nishay
Patel, fixed income strategist at Citi said.
ECB President Mario Draghi said last week that the central
bank was ready to offer banks more long-term loans to keep money
market rates from rising to levels which could push inflation
too low. The comments were also seen by some as a veiled attempt
to curb a rise in the euro which some fret could hurt a fragile
Italy's gross issuance will rise to 245 billion euros in
2014, excluding treasury bills, from an estimated 220 billion
euros this year, Citi said. RBS expected gross bond issuance to
rise to 238 billion euros in 2014 from an estimated 215 billion
euros this year.
Patel said increased issuance next year would be partly due
to higher redemptions.
Officially, Italy is looking to borrow about 470 billion
euros of debt in 2014, according to the head of debt management
at the Treasury, unchanged from this year's upwardly revised
target. The figure is much higher than the banks' forecasts
partly because it includes treasury bills.
"If the macro conditions continue to seem supportive for the
euro area it won't be so difficult for them to get support for
the auctions. The possibility of a new LTRO from the ECB before
the end of the year will boost demand," Alessandro Giansanti,
senior rates strategist at ING, said.
Even without ECB support, analysts say the backdrop is
better for issuance given the euro zone economy is gaining
traction and borrowing costs are back at more manageable levels.
Spain should be in an even better position than Italy to
easily issue bonds next year, given sentiment towards its bonds
has improved with a pick-up in the economy and as it became a
favourite alternative to political crisis-ridden Italy.
Indeed, the average interest rate on Spain's outstanding
debt stood at 3.76 percent last month - its lowest level since
2010, according to Treasury data.
Earlier this year the prospect of reduced U.S. stimulus
drove both Italian and Spanish yields above 5 percent in the
secondary market, but analysts say "tapering" by the Federal
Reserve is now priced in.
"I don't see much of an impact as the U.S. tapering will
take place when the conditions for GDP growth in the euro zone
and globally are expected to continue to improve," Giansanti
Italy and Spain are also seen remaining reliant on domestic
investors who, reassured by the ECB's untested promise to buy
bonds of struggling sovereigns if requested, have stepped in
when foreign demand has slackened.
Spain's budget foresees the Treasury needing to raise 243.9
billion euros of gross debt next year compared to an expected
issuance of between 215 and 230 billion euros for 2013.
Focus will also be on Ireland, which is set to become the
first euro zone country to exit an international bailout later
this year and will resume a modest auction programme in 2014.
David Schnautz, interest rate strategist at Commerzbank,
said Ireland would have to show it was committed to a full
market return in 2014 after deciding not to issue any more bonds
"What certainly will continue to help is if they show they
are able to tap the market in the long end and potentially even
longer than 10 years on a fairly continuous basis," he said.
At the region's core, Citi expects Germany to reduce its
issuance by 22 billion euros to around 161 billion euros of
bonds in 2014 while France will borrow slightly more after the
budget deficit came out worse than expected this year.