Spain and Italy Can Sit on Their Debt
Two market developments this week broadcast a wakeup call to Europe's most indebted governments. With investors willing to lend euros at the lowest interest rates ever seen, Europe should be cutting back on short-term borrowing and replacing it with debt that's repayable in later years. It's an opportunity that may not last, probably won't be repeated -- and is currently being squandered by Spain and Italy.
Yesterday, Mexico became the first borrower to sell euro-denominated government notes that don't get repaid for 100 years, offering investors a yield of just 4.2 percent on its so-called century bonds. Also yesterday, Switzerland became the first nation to sell 10-year debt at a negative yield, meaning investors are paying for the privilege of having their money in the perceived safety of Swiss government debt. While other governments have held auctions for shorter-dated securities that attracted negative yields, it’s the first such sale covering a decade.
The message of the two sales is that investor appetite for long-dated debt is pretty much insatiable. So Italy, with debts equal to more than 130 percent of its gross domestic product, and Spain, with a ratio of about 100 percent and rising, should be pushing back their repayment schedules. Persuading your creditors to give you more time to repay them is a sensible strategy when you know that your indebtedness is likely to increase rather than diminish. It makes even more sense when the relative cost of achieving that extension is shrinking. Spain's 10-year borrowing cost of 1.2 percent compares with 0.5 percent for five-year money; that premium has almost halved in the past six months
But Spain and Italy have been ignoring this logic. The average maturity of Spain's debts, for example, is currently 6.32 years, according to data compiled by Bloomberg. Crazily, that's shorter than the 6.49 years prevailing five years ago. Instead of taking advantage of the cheapest long-term money the world has ever seen, Spain's repayment profile has shortened, as these three charts show. The top picture represents the current repayment schedule, the middle shows what it was in the first quarter of 2010, while the green line in the bottom diagram shows the shift between the two calendars:
There's a similar picture in Italy, where the average time to repayment is going in the wrong direction and has shrunk to 6.42 years currently from 7.18 years at the start of 2010. Belgium, with a debt-to-GDP ratio of about 107 percent, is moving the right way, adding more than two years to its time-to-repayment since 2010, with savvy borrowing extending the average to 7.9 years.
The star performer in the euro region, though, is Ireland, which has more than doubled its average repayment out to 14.87 years from 6.82 years since the start of 2010.
Maybe the borrowing chiefs of Spain and Italy should give the debt managers in Dublin a call. With governments unlikely to kick their debt habit anytime soon, they can at least serve their taxpayers by exploiting the distorted demand for debt on today's markets.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Mark Gilbert at email@example.com
To contact the editor on this story:
Cameron Abadi at firstname.lastname@example.org