European governments go direct to citizens to fund borrowing
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European countries are increasingly going directly to their own citizens to fund their ballooning borrowing needs, in a retail push partly designed to press high street banks into raising the interest rates they pay to depositors.
Italy, Belgium and Portugal have issued about €60bn worth of bonds directly to households so far this year, up from €26bn last year, as savers flock to the higher yields offered by governments.
Italy is returning to the market in October with a second sale of its retail-focused “BTP Valore” bond. The debt, which was first launched in June this year and pays a premium if you hold it to maturity, raised a record amount for debt pitched at retail investors of €18bn.
Analysts note another advantage of opening government bond issuance to citizens is that it provides a safe place to put savings, as, unlike with high street banks, there is no deposit insurance limit. It also cuts out the middleman as some banks take savings and invest the proceeds in government bonds.
Frank Gill, sovereign specialist for Europe, Middle East and Africa at S&P Global Ratings, said he expected European countries to step up their issuance of bonds targeted at retail investors. That is partly to fill the void left by the European Central Bank stopping most of its bond-buying but also to push commercial lenders to offer higher deposit rates.
“Commercial banks have been clearly very reluctant to pass on higher policy rates to depositors and they are relying on the complacency of customers not to move their money,” said Gill. “But I expect commercial banks are going to start fighting back soon by launching new products linked to long-term bond yields.”
The spotlight has turned to retail debt ownership following a blockbuster issuance of a one-year bond from Belgium, which raised close to €22bn last week, more than four times its target, enabling it to pare back future issuance.
Jean Deboutte, a director at the Belgian debt office, said the government had wanted “to motivate the banks to give more to depositors” and he was “very pleased” with the result having initially hoped it would raise up to €5bn. He added the bond attracted “a lot of interest from abroad”, which he thinks will put pressure on other countries to follow suit.
The coupon on the bond was set at 3.3 per cent, below the 3.6 per cent yield on Belgian one-year Treasury bills. Officials estimated that, by reducing the amount of debt it needed to issue in the market, the government has reduced its borrowing costs by as much as €152mn over the next decade.
Camille de Courcel, head of European rates strategy at BNP Paribas, said governments were “responding to the large source of retail demand out there” while also diversifying their own investor bases and in many cases exploiting a cheaper way to issue debt.
“Retail issuance can also act as a substitute for bond supply, putting downwards pressure on bond yields and potentially save costs,” said de Courcel. “It can allow them to place a sizeable volume of issuance in one go without having to go to the market. One point here is that they avoid fees that would have been paid to banks.”
Italy has been issuing bonds specifically targeted at individual savers for over a decade, with the first “BTP Italia” — which include inflation-linked returns — issued in 2012. Analysts say the key reason for Italy’s retail bond programme is to diversify the government’s funding sources and boost domestic debt ownership.
Portugal increased the amount of debt sold to retail investors by €11bn in the year to July, while Greece opened up a bond auction directly to citizens last week for the first time since 2021, raising €187mn, with subscriptions capped at €15,000 per person.
As well as higher yields than most high street banks, governments are also offering tax incentives for citizens who buy their debt. Italy and Belgium’s government bonds are taxed at about half the rate of other savings and investment products. Greece’s bonds were issued free of tax.
“It’s an obvious win in terms of being able to finance yourself easily,” said Richard McGuire, head of rates strategy at Rabobank. “And you can also score a political win by forcing banks to pass on higher savings rates.”