Italy Charges Ahead With Expensive Dollar Bond Funding Ploy

(Bloomberg) -- Italy is seeking to sell more bonds, but this offering is different: it’ll be denominated in dollars, not euros.

Europe’s second most-indebted nation is aiming to sell securities maturing in 2026, its first dollar offering in over a year, following calls with global investors. While it’s a chance for Italy to diversify an investor base still dominated by domestic buyers, the nation will pay considerably more to raise cash.

The difference in yield between outstanding dollar bonds due October 2029 and an index that tracks 10-year euro-denominated securities is about 165 basis points. When swapped back into euros, that gap is reduced to around 15-20 basis points, said Davide Iacovoni, the head of public debt for Italy’s Finance Ministry, in an interview with Bloomberg Television.

He said that some of the difference was due to the bonds not being eligible for European Central Bank purchases, adding that the country would consider sales in other currencies too. Iacovoni also said that Italy would issue a new green bond “soon” with a framework for the securities set to be published in the “coming weeks.”

Still for some investors, it raises the question of why it’s ready to pay a higher rate to lure in U.S. investors when it could borrow money more cheaply via its own currency -- not to mention the cheap emergency loans offered by the European Stability Mechanism, which have become politically controversial in Italy.

“This is anti-economic but they still do it for political reasons,” said Giuseppe Sersale, a portfolio manager and partner at Anthilia Capital Partners Sgr SpA in Milan. “Leaving demand unmet is not savvy, so if there is demand I would rather pay the spread if small.”

Borrowing Soars

The country aims to raise $3 billion from the dollar offering, according to a U.S. Securities and Exchange Commission filing, though last year it raised more than double its estimates. It has already drummed up 6 billion euros ($7.1 billion) from a regular auction this week, and retail buyers placed 5.7 billion euros of orders for a tiered-coupon security, known as a “Futura.”

While the country’s borrowing needs are soaring amid the pandemic, the need to utilize fresh sources of money is actually less acute than it has been for many years. Italy’s 10-year euro bond yields are near a record low, falling three basis points to 0.65% Friday, and their risk premium over German debt is the smallest since 2018.

That’s thanks largely to the ECB buying up a bigger share of the market, while European Union leaders are paving the way to jointly issue debt across the bloc, alleviating some of the pressure on Italy’s own balance sheet. Iacovoni said the nation’s debt is sustainable, and there’s a “strong commitment by the government to bring the debt-to-GDP ratio down in the next few years.”

Still, Italy’s funding needs remain daunting. The country will need as much as 10 billion euros per month to compensate businesses and workers hit by virus restrictions. Debt has already risen close to 160% of output, and the government’s worst-case scenario sees gross domestic product falling 10.5% this year and rising only 1.8% in 2021.

©2020 Bloomberg L.P.