May 24, 2018 / 10:28 AM / a month ago

Fears of government spending spree hits debt of Italian state agency CDP

LONDON, May 24 (Reuters) - Debt of Italian state agency Cassa Depositi e Prestiti (CDP) is taking a hammering on a par with that suffered by Italy’s government bonds on fears the incoming government will use it as a vehicle to fund a borrowing binge.

The state-owned institution, which operates as a promotional institution, funding state or local authority projects, is similar to — though smaller than — Germany’s KfW and France’s Caisse d’Amortissement de la Dette Sociale (CADES), whose debt is considered a proxy for the sovereign’s.

With two anti-establishment parties, 5-Star and League, set to form a coalition and potentially increase public borrowing, Italian bond markets have sold off heavily, with average 10-year yields rising around 65 basis points since early May.

But CDP is also in focus, after it was mentioned prominently in an agreement between the two parties that was leaked to media. Referring to CDP as a “superstar”, the document proposed increasing its annual borrowing to 70 billion euros.

If implemented, such plans would take CDP from being a small issuer, borrowing at most a few billion euros a year in international markets, to the realms of giant agencies like KfW and the European Investment Bank, which routinely borrow 60-70 billion euros annually.

Though this proposed borrowing figure did not appear in the final agreement, the coalition did hint at an enhanced role for the state agency via the creation of a public investment bank using “existing structures and resources”.

5-Star officials have demanded in the past that CDP play a greater role in helping Italy’s economy and also want to replace its current heads when their terms expire this year.

All that has hit CDP’s bonds, with the yield on its 2024 issue up nearly 40 basis points over the past week to 1.73 percent.

The yield on its 2026 bond has surged to a record high 2.12 percent, up 38 bps from last Wednesday — the day after the document was leaked to media. Bond yields rise when their prices fall.

The move contrasts with the relative stability seen in the debt of French agencies such as CADES as French government bonds weakened ahead of the presidential election there last year.

“We will have to wait and see what CDP’s role is eventually, but there is a danger that if the new government carries out its plans, it could mean extra spending for CDP,” said DZ Bank strategist Christian Lenk.

“We will see way more BTP (Italian government bonds) funding and also extra CDP borrowing if it is used as an additional vehicle.”

CDP issued less than 1 billion euros of bonds last year, according to Thomson Reuters data, and currently has only about 14.8 billion euros of international bonds outstanding.

That includes 500 million euros of “social bonds” it sold last year to support small and medium enterprises located in economically deprived areas of Italy or hit by natural disasters.

IN LINE

The sell off in CDP’s debt has been more or less in line with Italian government bonds, which investors have dumped due to coalition plans to cut taxes, spend more on welfare and scrap pension reforms. Equities too have fallen heavily, led by banks.

The ripple effect from any changes at CDP could be wide, as the agency holds the Italian state’s stakes in companies including Telecom Italia, oil services firm Saipem and broadband company Open Fiber (IPO-EOF.MI).

Not everyone was unhappy on Thursday about the prospect of more borrowing by CDP.

“If it means additional borrowing for CDP, it makes sense that these bonds are tanking,” said one banker, who preferred to remain anonymous as he is not authorised to speak about his clients. “But more borrowing for CDP means more business for us, so bring it on!” (Reporting by Abhinav Ramnarayan, Additional reporting by Steve Scherer Editing by Catherine Evans)

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