* Spain, Italy average debt maturity lowest since 2004
* About 40 pct of total debt expires in next 3-4 years
* Growth outlook offers opportunity to sell long-term debt
* More long-term debt sales could slow recent rally
By Marius Zaharia
LONDON, Jan 17 Spain and Italy are grabbing a
historic opportunity to lengthen the average life of their debt
and pull themselves out of a dangerous spiral of short-term
Both countries have said they plan to issue longer-term
debt, taking advantage of a revival in appetite for such
high-yielding bonds to free themselves from the treadmill of
keeping up with frequent repayment deadlines.
Even now, more than 40 percent of Spanish debt expires in
the next three years and a similar chunk of Italian debt comes
due in the next four years, Reuters calculations show.
But if they can tap into renewed investor interest and keep
selling long-dated bonds, they can fundamentally improve their
financing position, which had investors so leery in 2011 and
2012 that many outside the euro zone predicted the bloc's
Signs of economic recovery this year and central bank safety
nets introduced to tame the crisis, which erupted in Greece in
2010 and spread to the region's other highly indebted nations,
have helped bring down both Italian and Spanish 10-year
borrowing costs by about half a percentage point
so far this year.
Falling overall financing costs argue for longer maturities
to be issued. The total average interest rate Spain paid on its
debt was 3.73 percent at the end of 2013, down from 4.07 percent
in 2011, according to Treasury data.
Spain can now sell nine-year bonds at its average rate of
funding, whereas late in 2011 it could not even sell three-year
bonds at the then average rate.
Italy sold bonds in 2013 of an average maturity of 7.6 years
and an average cost of 3.61 percent - the current cost of
nine-year bonds, according to Reuters and Commerzbank data.
"Increasing it (the average life of debt) must be the
biggest theme of the year for Italy and Spain," said David
Schnautz, rate strategist at Commerzbank in New York.
"It's a very realistic plan. Pension funds and others have
nominal yield targets and stepping down the credit spectrum is
the lesser of many evils for them. Looking at what Germany
offers, you can double that with (Spanish and Italian bonds)."
But while growth holds down the debt burden relative to
gross domestic product, both countries remain acutely vulnerable
to shifts in sentiment with debt loads of 0.9 and 1.3 times
economic output in Spain and Italy respectively.
At the end of 2013, the average maturity of Spanish and
Italian debt was 6.2 and 6.44 years, respectively - both their
shortest since 2004 and off highs of 6.82 and 7.2 years.
"As the crisis wanes and the fiscal situation improves, they
still have to issue a lot (of bonds), not because of a high
(budget)deficit, but because of high redemptions," said Gianluca
Ziglio, an analyst at Sunrise Brokers.
"This makes the bonds less attractive... If issuance shifts
towards longer maturities, investors would have to ask a premium
He added though that a major reversal of the falling trend
in bond yields was not necessarily on the cards. Only another
dip into recession or a political crisis could cause that.
In the future, investors would actually consider a longer
life of overall debt an appealing feature of those markets.
Spanish 10-year borrowing costs trade at their
lowest in about 4 years at around 3.75 percent and not far from
euro era lows. Italy's debt costs are back to 3.85
Their 15- and 30-year bond yields are also at or close to
multi-year lows, and just over half what two-year yields were at
their crisis peaks.
In its 2014 strategy, the Spanish Treasury said its aim was
to at least stabilise the average maturity of its debt. Maria
Cannata, the head of Italy's debt agency, has repeatedly said
she will try to increase the debt's lifespan if she can.
Both sovereigns are already making progress. By this time
last year, the longest-dated debt Italy had sold was about 500
million euros ($680 million) of a 2022 bond. This year, its
longest tap was a 2028 bond for 1.695 billion euros.
Spain this year has already sold about 5 billion in 2026 and
2028 bonds and analysts expect a syndicated deal for a bond
maturing in at least 10 years to be scheduled soon. By this time
last year, the longest bond it sold was a 7 billion euro,
10-year through a syndicate of banks.
Sandra Holdsworth, investment manager at Kames Capital, is
one of the investors who has recently increased the overall
maturity of Spanish and Italian bond holdings.
"We have moved up the (yield) curve because we've become
more certain the periphery was having an economic rebound and
we're still seeing that," she said.