* Changes to collateral swap agreements on hold
* High swap charges likely to nullify arbitrage
By John Geddie and Christopher Whittall
LONDON, Jan 24 (IFR) - Italy's plans to return to the dollar
market after a near four-year hiatus are being hampered by
delays to crucial changes to its derivatives contracts,
jeopardising its chances of broadening its international
The country announced at the end of last year that it would
look to sell its first benchmark dollar issue since 2010 as it
tackles a EUR470bn gross issuance programme in 2014.
However, its chances were greatly diminished after the
government failed to present a crucial legal change to
parliament on schedule at the end of last year [ID: nL5N0ID448].
The changes, penned by Italian lawmakers in October, would
have allowed Italy to post collateral against derivatives
contracts, helping reduce the credit exposure of bank
counterparties and thereby improving all-in swap costs [ID:
"In order to justify issuance in another currency, Italy
needs to make a cost saving to its euro curve after the swap," a
banker at one of Italy's primary dealers told IFR.
Bankers say their charges for executing swaps with
asymmetrical collateral agreements would be significant. They
are already wallowing under the country's notoriously large
uncollateralised swaps portfolio - estimated by some dealers as
being in the region of EUR40bn.
"There may be some arbitrage opportunities later in 2014,
but if the margin is eaten up in derivative charges then it will
make no sense," said the banker.
A spokesperson for the Tesoro told IFR: " was not the
most appropriate occasion for such a specific measure: there
could have been the risk to not be adequately analysed nor
"The new regulation will likely be submitted in a more
targeted measure, unifying it with other similar ones by
As well as a blow to the banks, the delays could stifle
Italy's chances of capitalising on renewed interest from
international investors in its debt.
Currently around 61% of Italy's bonds are held domestically,
with around 9% held at the European Central Bank and 30%
overseas, based on the latest figures from the Bank of Italy.
Distribution snapshots from recent syndicated transactions
show that the overseas placement of Italian debt is heavily
concentrated in Europe.
The delays also mean that the market could be moving away
from Italy. Since Spain launched a USD2bn five-year in February
2013 after a three-and-a-half-year absence, the benefit of
swapping from US dollars to euros has reduced by around 15bp,
from 25bp to around 10bp, before additional swap costs and
The two previous dollar deals from the Republic of Italy
allowed it to save as much as 23bp versus its euro funding.
This is not to say that Italy can't stage a comeback without
the changes, however.
"I want to say it is an impossibility, because clearly we
want them to change, but I cannot completely rule it out," said
a senior public sector origination banker at another of Italy's
Spain only has one-way collateral agreements, but was able
to sell the dollar deal because one domestic bank offered to do
the swap, bankers close to that transaction say.
(Reporting by John Geddie and Christopher Whittall, editing by
Helene Durande and Julian Baker)