According to the official financing strategy documents published by the national treasury ministries of the seven main nations of continental Europe, gross government bond issues in 2020 should amount to around € 744.2 billion, therefore around € 4 billions of euros more than 2019 emissions.
This increase is attributable to a marked containment of the net financial needs of the European countries.
In this sense, it is not unreasonable to conclude that, being the volume of repayments approximately similar to the volume 2019 (respectively 647 billion euros today compared to 640 billion euros 2019 ), experts estimate that the greater public expenditure should translate into an increase in gross emissions of government bonds. Even the net issuance of government bonds, which include equal to gross issuance net of redemptions, may decline slightly during 2020 (approximately 128 billion euro from 130 billion euro in 2019 ). Note on the other hand that, this reduction in the stocktotal net issues in 2020 could be accentuated taking due account of the effect of ECB government bond purchases under the Asset Purchase Program ( APP ) .
However, it should be remembered that the German treasury has clearly declared itself in favor of using the issue of banknotes to replace bonds in order to finance the state coffers. This preference should be read in market terms as an additional factor contributing to increase the scarcity of German paper in light of the greater demand from APP ECB .
The central issue dealt with in this paper is in this sense to understand how European government bond issues can on the one hand provide fresh resources to the public accounts of the respective states, on the other hand support the markets by absorbing the demand deriving from the ECB Quantitative Easing .
In this perspective, the issue of public debt must support both the extension of maturities and the active management of the financial structure of the respective states.
Some major investment banks have estimated a slightly higher bond issue in the euro area than in 2019, partially attributable to higher redemptions than last year and partially to the so-called fiscal easing . Not a few analysts have also put forward the hypothesis that some European states put ‘green’ bonds on the primary market, that is, that particular type of bonds intended to finance projects with a positive environmental impact. According to experts, Germany , Italy and Spain will open their debuts this year as issuers of this particular type of bond asset .
Turning to an in-depth analysis of the articulation of the emissions at national level, according to some market assessments Germany , the Netherlands , Austria , Finland and Ireland will be characterized by negative net emissions after the ECB net purchases , or gross purchases from which to subtract the reinvestments by deadlines. This phenomenon could last for two years, in light of the strong incidence of repayments which could remain high given the undeniable importance of issues on short maturities. Many experts tend to wait for two important phenomena :
- the extension of the average maturities of state issues, aimed at extending and distributing interest payments over time;
- introduction of repurchase plans ( buyback ) or modular exchange as a function of’ disruptive effect of the net purchases ECB evidently restored and now fully operational, since November 2019.
In summary, not a few experts expect issues of new ten-year or higher maturity benchmarks accompanied by an increase in very long issues up to thirty years , while supporting the substantial unchanged offer compared to 2019.
In light of the well-known and perceived flattening of the performance in scenarios characterized by somewhat lower efficiency, it is not unreasonable to assume that the euro area governments propenderanno to increase the duration average of their stock of debt to take advantage of low costs of funding .
On the investor side , not a few operators expect a greater demand for public securities whose yield is linked to European inflation , securities that can guarantee an acceptable yield pickup compared to ‘nominal’ issues in this rate scenario. On the other hand, the phenomenon of the seasonality of the net offer , as always accentuated, should not be overlooked . The gross bond issues of the European Stability Mechanism and the EFSF ( European Financial Stability Facility ) should record stable values and net supply close to zero .
The most important interpretation is to understand and interpret in an integrated way :
- on the one hand the government emission programs ,
- on the other, the ECB’s securities purchase plan which is expected to remain valid until the end of 2020 at the current rate of 20 billion in total of both government and private securities, and should be satisfied through approximately € 125 billion of nominal government bonds.
Moving on to a more accurate observation of the weighted average duration of the issues, it is possible to reasonably deduce the existence of a negative correlation between the weighted average maturity of the government offer (and in particular German ) in the euro area and the yield of German or 10-year Bund . Purely hypothetically, in this sense, the expected yield of the 10-year Bunds at the end of 2020 could further decrease encouraging the sovereign issuers of the economically stronger countries in the euro area to extend the maturityof their public debt during the year. On the other hand, it is not unreasonable to assume that a phenomenon of convergence towards long maturities could also occur in the issuance programs of the so-called ‘ peripheral ‘ countries characterized by a lower rating .
Below are some estimates of the gross and net 2020 emissions of the main European government.
GERMANY
The 2020 budget law presented by Germany to the European Commission in October 2019 is certainly expansive in that it provides for a reduction of the structural budget surplus of 0.75% of GDP compared to 2019.However, it is not a trivial detail that this law does not imply the creation of new public debt in the next three years.
In 2020, the gross issuance of German public securities could amount to around 148 billion euros . The issue of short-term securities could increase significantly by around € 12.5 billion . With reference to the 2-year Schatz , the German state expects gross issues of 51 billion euros against reimbursements of 49 billion euros distributed over 12 auctions. Moving on to the observation of the 5-year Bobl ( Bundesobligation ) , issues of € 36 billion are expected against redemptions of € 39 billion distributed over 11 auctions. As for the Bund Thirty Years, € 12 billion in securities will be issued in 11 auctions. Separate discussion deserve the Bund European inflation-linked which may be issued in August and December for volumes between 6 and 8 billion in this area, we could witness the arrival on the market of a new Bund linked to inflation maturing in 10 years . The emissions ‘ green ‘ should cover the funding program of the German treasury only in the second half of 2020. As for the news , could be envisaged is the launch of 4 new Schatz , both of two new Bund , two new Bobl and the first green bondsof state. Some experts, as previously anticipated, agree in raising the weighted average duration of the German debt in order to take advantage of the contained rates opportunistically .
FRANCE
According to balance sheet data, in France, the state deficit is expected to drop slightly from 96 billion in 2019 to 93 billion euro in 2019 , of which 38.6 billion in interest expenditure. The gross issuance of BTAN and OAT may have remained unchanged compared to previous years. From this consideration, it follows that, a substantial part of the French public needs will be financed by increasing the amount of outstanding outstanding BTF. By taking a closer look at the ‘new unborn’ among public securities from across the Alps, the French treasury will issue a new 2 or 3-year bond, a new 5-year bond and a new 10-year OAT. We also point out that the issue of a new thirty-year bond through syndication could also be taken into consideration , always keeping a careful eye on the possible satisfaction of institutional investors in pursuit of returns. Turning to the possible inflation-linked bonds, 2020 could see the debut of a new security whose return is linked to internal inflation , with medium-long maturity (10 or 15 years) referring to the French consumer price index ( OATi) and a new five-year security indexed to the European consumer price index ( OAT € i ). With specific reference to green bonds , the French Treasury ( AFT ) could re-propose the 20-year issue already carried out in January 2017. By passing the issues of new benchmarks in a rapid review , these should concern in addition to the maturities of 2, 5 and 10 years, even the 15 and 30 years. However, we cannot completely dismiss the hypothesis that the French treasury decides to issue a new 50-year OAT . The actual duration figureweighted average of 2020 issues remains the great unknown because it is a function of the bond yields of European government bonds and is significantly influenced by the propensity to their demand by institutional investors .
HOLLAND
The view on the Dutch public budget is extremely positive . It should be noted that the public finances of the Netherlands show an expected surplus of 0.2% of GDP in 2020 and a reduction in the debt / GDP ratio to 47.7% from 49.1% given 2019. Government bond repayments expected for 2020 remain aligned with the values recorded in the previous year. As a result, the DSTA ( Dutch State Treasury Agency ) will increase the gross issuance of bonds, which will result in higher net issues than in previous years. With express reference to the new stocks, the Dutch treasury plans to place a new DSL ( Dutch State Loans ) with a ten – year maturity (July 2030) through a Dutch direct auction , with an exceptional final volume of around 12 billion euros. As for green bonds , after the first DSL issue expiring in January 2040 launched in 2019, 2020 could see Green bond issues for a minimum amount of around 2 billion euros , offered through at least two competitive auctions . With specific reference to the average duration of the issues, the Dutch treasury intends to extend the maturityaverage of its portfolio in the coming years from the current target of 6.4 years to 8 years by the end of 2025. The launch of a new ten-year benchmark and a new thirty-year one is also expected .
SPAIN
For 2020, the stability program presented to the European Commission last October foresees a decrease in the deficit of the Spanish public administration to 1.7% of GDP from the 2% recorded in 2019. The Spanish Treasury will issue 117.47 billion euros gross in medium and long-term public securities also in order to make up for repayments of around 85 billion. These amounts would imply a net issue of € 32.5 billion; however, the treasury showed that the securities program is subject to changes during the year. It should also be noted that Spain intends to debut with a new green bond in 2020. With specific reference to the methods of offering public securities, the auctionsthey will remain the main issuance method for the Iberian government, but syndicated placements will also be used . Experts speculate that the Spanish Treasury will also offer new bonds. In this sense, 2020 could be the year of the new ten-year probably expiring April 2030 and a new 15-year security (estimated size 5.0-6.0 billion euros) together with a twenty-year green bond to offer to the markets bonds in the second half of 2020. As with other European countries, the Spanish Treasury has also clearly indicated its willingness to extend the average maturity of its public debt and has shown its preference for bondswith a residual maturity of between 10 and 15 years. Some experts predict that the Treasury will issue linkers, that is, inflation-linked securities, offering them at auction in conjunction with other nominal securities. In summary, there will be two 2020 objectives for the Spanish treasury: lengthening of maturities and reduction of the average interest cost of the debt stock .
PORTUGAL
In Portugal, gross issues are expected to amount to € 16.7 billion , consequently net issues are expected to be € 8.7 billion also in order to finance the growing cash deficit of the Portuguese government. This positive net issue could lead the reader attentive to the conclusion that the debt agency intends to translate the distribution of public debt from non-negotiable instruments into liquid and negotiable securities to improve the liquidity characteristics of its bond portfolio. Turning to the analysis of the new stocks, on January 7th Portugal offered through union a new benchmarkdecades. Bond exchange and buyback transactions are also conceivable to improve the repayment terms of Portugal. In this regard, according to the writer, the deadlines 2021 and 2022 are particularly delicate . The scenarios relating to the new issues touch in particular the 10.15 and 30 year maturities with securities that trade widely above par.
BELGIUM
With reference to the net issues of the Belgian treasury, these will presumably increase to compensate for a greater budget deficit than in 2019. Moving on to the analysis of new securities, the Belgian Debt Agency intends to issue two new fixed rate OLO ( Lineaire Obligatie ) benchmarks through syndication. A new ten-year period together with a benchmark is also highly anticipatedlong-term expiry dates of between 15 and 20 years. The Belgian public debt agency plans to repurchase bonds maturing in 2021 and 2022 for an amount of 2.9 billion euros. With reference to the weighted average duration of the portfolio, this stood at 9.8 years in 2019, and will probably be maintained at values beyond 9 years in 2020. Finally, the Belgian treasury intends to launch two new OLO benchmarks .
GREECE
The Greek state has requested the early repayment of a portion of the loan tranche due to the International Monetary Fund by the end of 2020 through the monetary revenues deriving from bond issues. In 2020, 1.36 billion of Greek public securities in the ECB portfolio will expire in addition to other loans for 1.4 billion and a tranche of loan obtained from the International Monetary Fund equal to 2 billion euro, for a total of 4.9 billion . In the optimistic hypothesis that the Greek budget surplus is 1.1% of GDP in 2020 compared to 1.2% in 2019, the country is fully financed by available liquidity . Fitch raised theGreece’s credit rating from “BB-” to ” BB ” and its prospects from “stable” to ” positive ” bringing Greek debt to two levels below the coveted ‘Investment Grade’ qualification, which would make Greek securities present in the portfolios of eligible European financial institutions as collateral for ECB financing operations.
IRELAND
The Irish public financial needs 2020 amounted to 17 billion euros , made up largely of maturing securities, of 2 billion euros deriving from the repayment of the bilateral loan obtained by the United Kingdom, from the cash deficit (compared to a surplus target of the public administration of 0.2% of GDP ) and 3 billion in provisions. The Irish debt agency plans to issue securities for 10-14 billion euros gross, with consequent net negative issues . At least one union issue is also expected in 2020. Ireland will continue its efforts to extend the average maturityof government bonds, consistent with its strategy to take advantage of the ECB ‘s Quantitative Easing , reducing interest costs and repaying its debts to the International Monetary Fund .
AUSTRIA
The Austrian state has announced for 2020 total issues for amounts between 31 and 34 billion euros . In particular, as regards the RAGB ( Republic of Austria Government Bonds ) securities, the issues will range between 18-21 billion euro. As regards the offer instruments chosen, it is reasonable to foresee that, as happened in 2019, also in 2020, an important part of the loan will be made by using the EMTN ( Euro-Medium Term Note ) market. In net terms, emissions will be positive for 1-2 billion, this is because the Austrian public budget will record a limited deficit equal to 0.1% of GDP. The Austrian Treasury expects one or two syndicated issues in euro to be carried out during the year together with a weighted average duration of the debt expressed in securities equal to about 10 years by the end of 2020.