April 25, 2012 / 2:45 PM / in 7 years

GRAPHIC-Crisis drives Italy and Spain into short-dated bonds

LONDON, April 25 (Reuters) - Italy and Spain’s efforts to kick their debt repayments down the road by selling long-term bonds have been stymied by deteriorating investor confidence, forcing them into short-term sales that pile up refinancing risks for the near future.

The average maturity of debt issued by Spain so far this year is 5.17 years, almost half the 9.86 years in the same period of 2011, Reuters data shows. For Italy, the maturity of fixed-coupon bonds sold at auction is 5.65 years, down from 7.94 years.

Most government debt is rolled over rather than paid off and as the average maturity of a country’s debts falls, the amount of bonds it has to sell each year rises. This makes it more exposed to a worsening in market sentiment that could push borrowing costs higher, even to unaffordable levels.

Both Spain and Italy have paid close to 6 percent to sell 10-year debt this year, a level at which borrowing costs accelerated for Greece, Ireland and Portugal, forcing them to seek international bailouts.

These three countries remain locked out of long-term debt markets and totally reliant on short-term borrowing.

For fund managers, a sharp fall in debt maturity can raise a red flag against further investments, creating a vicious circle that can quickly make a country’s debt unsustainable and more likely to be restructured.

Rating agencies view a high average maturity of a country’s debt stock, along with an even distribution of repayments, as a sign of strength and good liability management.

Italy and Spain have been forced into long-term debt sales by concern over the health of their public finances that has seen long-term international investors, such as pension and insurance funds, cut back holdings of both countries’ bonds.

This slack in demand has been taken up by local banks that borrowed heavily when the European Central Bank handed out cheap three-year loans in December and February and used the money to load up on higher-yielding government bonds.

Debt with a shorter maturity, covered by the ECB loans, has been the biggest beneficiary of the domestic buying.

However, at this early stage the shortening impact on the total Italian and Spanish government debt stocks was limited.

Data issued by the Italian Treasury at the end of the first quarter showed the average life of its public debt had decreased marginally in the last year from 7 years to a fraction below.

Similar data from the Spanish treasury showed average maturity on all government debt falling to 6.4 years in February, compared to 6.59 at the start of 2011.

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