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EURO DEBT SUPPLY-Potential ECB support to benefit 2014 funding
October 4, 2013 / 4:51 PM / 4 years ago

EURO DEBT SUPPLY-Potential ECB support to benefit 2014 funding

LONDON, Oct 4 (Reuters) - 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 prospects.

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 banks said.

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 U.S. stimulus.

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 of markets.

“(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 economic recovery.

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 added.

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 this year.

“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.

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