Spain, Italy ramp up debt sales to confront daunting Covid-19 costs
In Italy, the Treasury sold a record 22.3 billion euros of five-year retail notes. Mom and pop buyers submitted around 14 billion euros in orders and the proceeds are tagged to fund the “Covid-19 emergency.”Updated: May 22, 2020 14:19 IST
Two of Europe’s most cash-strapped countries are stepping up bond sales to fund the surge in spending needed to shore up their pandemic-battered economies.
Spanish officials on Thursday boosted net debt issuance for this year to 130 billion euros ($143 billion), a fourfold increase from a target set in January. That exceeds a previous record set in 2009, in the depths of the region’s last major economic contraction.
In Italy, the Treasury sold a record 22.3 billion euros of five-year retail notes. Mom and pop buyers submitted around 14 billion euros in orders and the proceeds are tagged to fund the “Covid-19 emergency.”
Borrowing costs for both countries have dropped after France and Germany announced a plan to support a 500-billion-euro fund, backed by debt, as part of the euro area’s effort to help the most indebted countries avoid an economic crisis that could tear the monetary union apart.
Italy and Spain have been among the hardest-hit by the virus. Already saddled with much higher debt levels than northern neighbors, their economies are suffering a deeper recession because of strict lockdowns to curb the disease. Economists say the cost of spending too little could only mean a bigger fiscal crisis in the future.
But until European Union members endorse a deal to share the burden, support from the European Central Bank remains the main thing keeping bond yields from spiraling out of control. The ECB is vacuuming up securities issued by euro area members as part of its bolstered bond-buying program, which economists say could be expanded as early as June.
The German-Franco plan should boost demand for so-called peripheral debt “in theory,” but until more details emerge, markets will continue to assign a much greater probability to monetary easing measures rather than fiscal stimulus, said Antoine Bouvet, a rates strategist at ING Groep NV.
Italian and Spanish benchmark bond yields are roughly half of what they were in March, helped by increased ECB purchases. The spread of Spain’s 10-year bond yield over German bunds widened as much as five basis points, but then shrank after the Treasury’s borrowing announcement.
Spain’s central bank, which regularly buys sovereign debt under the ECB program, said it doesn’t comment on daily transactions.
Spain’s new target “does suggest a re-acceleration of issuance versus what we’ve seen so far in May, which should play out through June and July in particular,” said Henry Occleston, rates strategist at Mizuho International Plc.
What Bloomberg Economists’ Say...
“France and Spain look to have done too little, though automatic stabilizers are stronger in these countries; while Italy has done enough, but we are concerned that it has come too late.”
-- Jamie Rush, Maeva Cousin and David Powell. Read Full React.
In a briefing with journalists, Spanish Economy Ministry officials said Madrid was also likely to tap a new, joint European Union employment insurance fund worth 100 billion euros.
They said the government would likely be able to access around 15 billion euros in credit lines from the fund, which is being rolled out to help countries meet the spike in labor costs. Nations across Europe have underwritten the cost of furloughing tens of millions of private-sector workers.
Italy hasn’t ruled out tapping those funds, either, or another leg of the pandemic-crisis package -- the cheap credit lines from the European Stability Mechanism -- even though it has become a source of political contention.
The head of the nation’s debt agency, Davide Iacovoni, sees bond issuance rising by at least 90 billion euros this year.
One Fund Too Far
Meanwhile, Spain has said it doesn’t plan on borrowing from the ESM program because it has been able to meet most of its financing needs from the bond market.
ECB policy maker Pablo Hernandez de Cos earlier this week urged Spanish lawmakers to avoid “dramatizing” any discussion in Spain or elsewhere about tapping the region’s bailout fund.
“I would try to take the conversation out of the political sphere,” said Hernandez de Cos, who is also the governor of Spain’s central bank. “The government will decide if it’s appropriate.”