Italy's 2013 Sovereign Funding Outlook

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In 2013, the government sees a GG deficit of 1.6% of GDP (from an expected 2.6% this year) on the assumption of a 0.2% contraction. This compares with our view for a 2.1% deficit against the backdrop of a 0.7% contraction. The government projects the GG deficit/GDP ratio to progress lower from next year to 1.3% by 2015. The official projection is for the public debt/GDP ratio to peak at 126.4% this year before easing to 126.1% next year and progressing to 116.1% by 2015.

Among other fiscal consolidation policies, the government will carry out spending cuts estimated to save EUR10.8bn next year. The measures include reducing public employment by 10%; outsourcing of public procurement; reduction in office property running costs.

Borrowing requirement/Funding sources

We estimate next year’s central government (CG) deficit to be around EUR30-33bn, which accounts for the vast majority of our 2.1% GG deficit/GDP expectation. Italian bond redemptions amount to EUR154.6bn, where BTPs maturing total EUR117.4bn, CCTs EUR14.3bn and CTZs EUR22.9bn. In addition, the ESM contribution is worth around EUR5.7bn next year.

On the basis of the above, we see a funding requirement of EUR192bn. We forecast EUR192bn of BTP, CCT and CTZ issuance next year, on the assumption that net T-bill issuance is zero.

Another source of funding is BTP Italia (retail) bonds. The Treasury raised EUR27bn in total in retail bonds this year. Firstly, EUR7.3bn was issued in a 4Y in Q1, followed by EUR1.7bn in an inflation-linked security in June and a huge EUR18.0bn issued in another inflation-linked bond in October.

Preview of Q1 issuance and 2013 outlook

We have factored in new 10Y and 5Y BTP benchmarks in January and February, respectively, next year. In addition, there should be a new CTZ potentially in January. There should be taps across the curve, though we suspect the Treasury will be looking to raise more at the longer end than it has done during recent quarters.

Our expectation is for 3Y by early-Q2 and another new 5Y by end-Q2/early Q3, while we have not factored in a new very long bond in H1 next year, though there is room for new 15Y and 30Y benchmarks, with the current on-the-run issues having been launched two/three years ago.

Regarding the other instruments, we forecast monthly CTZ issuance, as usual, with a new bond likely in January. In addition, we anticipate quarterly CCT issuance continuing next year, with one new bond factored in during H213. We forecast marginally higher issuance of inflation-linked bonds in 2013 than this year, though this is a function of improving Italian fiscal credibility since economic performance (including inflationary indicators) is likely to remain subdued.

Our issuance total of EUR192bn could also include BTP Italia issuance, thus resulting in lower BTP issuance through the capital markets.

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