* 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)