December 7, 2011 / 9:18 PM / in 6 years

Analysis: Saving Italy key to euro zone 2012 funding plans

LONDON (Reuters) - Euro zone countries will find it increasingly difficult to finance themselves at affordable interest rates next year unless policymakers can reassure investors within two months that Italy will be able to repay its debt.

One by one, even the most creditworthy borrowers could be forced to resort to bonds carrying ever shorter maturities, raising their costs and increasing their vulnerability to uncertain market conditions.

The region’s funding needs are estimated at more than 800 billion euros next year -- a slightly lower total than in 2011, but one that could be much harder to reach. Each country’s financing strategy depends almost entirely on the fate of Italy, which implicitly carries with it the fate of the currency union.

Financial systems in the euro zone are tightly interconnected and any shock in Italy would be immediately felt across the region, even in healthier economies such as France or Germany. French banks have $400 billion exposure to Italy, German banks have $200 billion of exposure to France, according to BIS data.

Investors are impatient and time is running out as Italy, whose bond yields soared close to an unsustainable 8 percent last month, has to repay more than 90 billion euros of bonds between February and April.

“At least in the first half of the year we should see pressure on all countries, especially Italy and France,” Lloyds Bank rate strategist Achilleas Georgolopoulos said.

He said this could see more countries seeking to issue short-term debt as borrowing over 10 years or more became prohibitively expensive.

“The key signal that everything is going wrong will be a failed French auction. People will start to worry seriously about the euro,” Georgolopoulos said.

Ideally for the issuers, a European Union summit on Friday will take a significant step towards restoring market confidence in the euro and reduce funding stress throughout the region.

Optimism is high that agreement on a plan to strengthen euro zone fiscal unity will pave the way for more aggressive European Central Bank purchases of Italian and Spanish bonds to protect these countries’ market access while it is being implemented.

“As usual the devil will be in the details and (the plan) will be scrutinized in terms of how long it will take and what are the obstacles to achieve what had been agreed,” said Norbert Aul, rate strategist at RBC Capital Markets.

“Sentiment can change very quickly, which will make it difficult for Italy to retain full primary market access.”

Italy has issued around 60 billion euros of bonds since the ECB first intervened in late August and many of those auctions have been treated as potential disasters. For 2012, analysts estimate it will need to issue around 215 billion euros.


Euro 2012 supply and redemption schedules



Spain faces similar dangers as Italy, but its debt repayment calendar is less packed. It has around 15 billion euros worth of bonds and coupons due in April, according to Reuters data.

Belgium, the first country to meet its funding target this year despite periodic scares it might be swept into the crisis, could see a major improvement in its financing ability if Italian problems are solved. After an 18-month hiatus, it finally has a government, removing a major market uncertainty.

Other risks for 2012 issuance targets are a looming recession, uncertainty over the success of the planned austerity measures, and Greece’s ability to achieve the goals of its bailout deal to secure aid tranches and avoid a messy default.

If Portuguese and Irish yields remain elevated, analysts say the pair are at risk of being forced to restructure their debts and euro zone issuers may face volatility caused by talk of further private sector involvement in the second half of 2012.

“The country most at risk is Portugal because the spread is quite elevated and if they go into recession again as they are expected, the debt-to-GDP ratio will go even higher and it is at risk of some kind of restructuring,” said Alessandro Giansanti, rate strategist at ING.

Smaller countries like Finland and the Netherlands, which have low financing needs due to their low debt levels and generally high market credibility, could still sail through their 2012 funding calendar, analysts say.


If the worst case scenario materializes and the debt crisis causes a domino of sovereign and banking defaults, even Germany, still the least risky issuer, will suffer as well. Standard & Poor’s threatened this week to cut Germany’s rating if European leaders failed to agree a comprehensive anti-crisis plan.

On the other hand, any likely solution will involve either a higher fiscal burden for Germany via common euro zone bonds or budget transfers or higher inflation if the ECB prints money.

This may lead to more uncovered German auctions in 2012, as there have been over the past few weeks. To increase demand at auctions, Germany may eventually have to make price concessions.

“Whatever happens, yields will go up,” Lloyds’ Georgolopoulos said.

Graphics by Kirsten Donovan and Vincent Flasseur, editing by Nigel Stephenson

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