* Funding conditions in the euro zone among the best ever
* Ultra-easy central bank policy trumps other market drivers
* Debt managers say they must remain vigilant
* Low inflation is a risk for debt outlook, analysts say
By Marius Zaharia and John Geddie
LONDON, April 30 The euro zone's most vulnerable
economies are using some of the most favourable borrowing
environments they have ever seen to build funding buffers and
unclog refinancing bottlenecks.
Many analysts and investors expect high demand and record
low borrowing costs for several more years, but government debt
managers in the so-called periphery are taking no chances.
They are unsure how long this benign period is going to last
because the key factor behind the rally in Italian, Spanish,
Irish, Portuguese and Greek bonds - ultra-easy monetary policy
on a global scale - is only a temporary one.
While it lasts, the indebted, unemployment-hit countries of
the euro zone's periphery have to keep up reform efforts to
boost growth and cut deficits. But that is also an uncertainty.
To make sure, debt managers are staying well ahead with
their 2014 funding targets, with Madrid and Rome looking to
increase the average life of their debt stock so that re-funding
comes around less often.
With a third or more of their debt expiring in the next
three-four years, Portugal and Italy have issued longer-term
bonds in exchange for the ones expiring and have even bought
back some short-term bonds. Spain is mulling similar moves.
Such measures would offer them more protection and
flexibility in case the euro zone debt crisis returns.
"We must remain vigilant," said Pablo de Ramon-Laca, head of
funding and debt management at the Spanish Treasury. "Spain has
a lot ... to do by way of reforms and adjustment."
Portugal's treasury secretary, Isabel Castelo Branco, sent a
similarly cautious message last week when she told Reuters debt
yields could fall further - if the economy keeps recovering and
budget consolidation remains on track.
"WE ARE NOT RELAXED"
Greece made one of the fastest market comebacks ever of a
state that has defaulted, selling five-year debt under 5 percent
this month. Ireland and Portugal, which were bailed out in 2010
and 2011, can currently borrow for 10 years at 3-4 percent.
Italy and Spain can also borrow at record lows of around 3
percent, compared with over 7 percent during the crisis.
"We believe this is a long term normalisation process, not
just a honeymoon for Italian bonds," said Maria Cannata, the
head of debt management at the Italian Treasury.
"(But) we are not relaxed," she added, pointing to the fact
that she has already completed roughly 40 percent of this year's
funding target. Spain has completed 43 percent, Ireland has
reached over 70 percent and Portugal over 50 percent.
Pushing debt expiries further into the future is
particularly important for some. More than 40 percent of Spanish
debt matures in the next three years and a similar chunk of
Italian debt comes due in the next four years, according to
Reuters calculations. A third of Portuguese debt excluding
short-term bills matures in 2014-2018.
Spain has so far been most successful in extending
maturities. The average maturity of the bonds Spain sold in the
first quarter of this year was 8.3 years, versus 7.6 for the
whole of 2013 and 5.1 in 2012.
Ultra-easy central bank policy across the world has restored
the pre-crisis condition in which investors warn countries they
need to continue their reform efforts to cut debt and boost
growth, yet keep lending governments money at easy rates.
Record low interest rates and trillions of dollars of asset
purchases have almost erased the yields offered by top-rated
assets. That has eventually pushed investors towards riskier
products such as peripheral debt to maximise returns.
Italy's Cannata, who has been managing one of the world's
largest debt loads - now at roughly 2 trillion euros - for
almost 14 years, says she has not encountered such a favourable
marketplace in more than a decade.
Indeed, the current pace in the convergence of borrowing
costs across the euro zone is reminiscent of that seen around
the time the currency union came to existence in 1999.
Many argue that one of the causes of the euro zone debt
crisis was that the weaker countries were able to borrow at
similar rates to the stronger ones, making their policymakers
complacent about high debts and economic competitiveness.
Austerity advocates would say the latest signals coming from
politicians are a sign they have not learned their lesson.
Prime ministers in Italy and France have in the past month
voiced their intention to delay cutting their budget deficits -
the type of noise that only two years ago at the height of the
euro zone crisis would have rattled bondholders.
Cannata would not comment on this, but some analysts say
such steps could leave countries exposed to a reignition of the
crisis when central banks turn the money taps off.
It may well take several years before that moment comes,
though, if the European Central Bank is to follow in the
footsteps of its peers in the United States, Japan and Britain
and start buying assets to fight low inflation.
"As a government you can sell anything at this point," said
Alan McQuaid, chief economist at Merrion Stockbrokers.
"Are bond vigilantes asleep?" he said, referring to debt
buyers who traditionally see governments' problems and punish
them with higher rates. "They're going to wake up at some point.
But that could be years rather than weeks."
(Editing by Jeremy Gaunt)