A view of the Royal Bank of Scotland Group’s headquarters in London. Estimates from RBS, Morgan Stanley and Commerzbank show that Italy’s and Spain’s gross bond issuance will fall by roughly €20bn each to around €220 and €120bn, respectively.

Reuters
London

Eurozone government bond sales will fall below €900bn next year for the first time since 2011 as crisis-hit Italy and Spain work off their debt hangovers with the help of ultra-low borrowing costs.
Madrid and Rome have been rolling over emergency funding raised in the 2012 crisis in recent years, and can now take advantage of the plunge in borrowing costs to lengthen the average maturity of their debt, bringing to a close one chapter in the eurozone’s debt crisis.
“The fact that issuance has risen over the last few years is directly related to the debt crisis, and now we are starting to leave that behind,” RBS rates strategist Michael Michaelides said.
Estimates from RBS, Morgan Stanley and Commerzbank show that Italy’s and Spain’s gross issuance will fall by roughly €20bn each to around 220 and €120bn, respectively.
The bloc’s biggest economy, Germany, plans to borrow more cash in 2016 to handle the costs of immigrants arriving from the war-torn Middle East, but most of this will be raised in money markets with only a modest rise in bond sales.
Overall, eurozone government issuance is expected to come to €860-880bn, which will be similar to levels seen in 2011. With the European Union pressuring its members to keep down debt and deficit levels, there appears to be little likelihood of governments borrowing their way back into debt problems barring a slump in global growth.
The Italian treasury is expected to publish official debt issuance plans later this year, while the Spanish treasury will publish plans early in 2016.
A spike in borrowing costs for the two countries in 2012, on fears that the eurozone’s third- and fourth-largest economies may be headed towards a bailout, meant investors would only lend to them for short periods.
This built up a wall of debt that needed to be refinanced in the following years even after the crisis faded with European Central Bank president Mario Draghi’s pledge to do whatever it takes to save the bloc’s shared currency.
The fall in issuance next year is because much of this emergency funding has now been rolled over into longer-term bonds. Bond redemptions in Italy and Spain are set to drop by €18bn in 2016.
But strategists say it also reflects the savings being made in these countries as ultra-loose monetary policy from the ECB has pushed down the cost of borrowing for all member states, cutting their annual interest rate bill.
Italian and Spanish 10-year bond yields have dropped from over 7% in 2012 to record lows around 1% struck earlier this year.
Both countries have sold short-dated Treasury bills this year with negative yields, meaning investors are effectively paying for the privilege of lending to these governments.
“The cost to roll over debt has decreased and therefore overall issuance has decreased,” said Morgan Stanley strategist Jesper Rooth.
Record low rates will also allow eurozone countries to borrow over longer periods, reprofiling their debt to prevent repayment build-ups in the years ahead.
Germany said it would sell €9bn of 30-year bonds next year, up from €6bn issued in 2015. Commerzbank estimates that Italy and Spain will both issue new 30-year bonds in the first half of 2016 expected to raise around €8bn between them.
Data from the Italian treasury shows Rome is set to increase the average life of its debt this year for the first time since 2010. Third quarter results showed the average life stood at nearly 6.5 years, up from 6.4 years in 2014 and a high of 7.2 years in 2010.
Spain is expected to further build on a turnaround in its average debt seen last year when it ticked up to 6.28 years. It hit a pre-crisis peak of 6.8 years in 2007.