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The introduction of BTP Valore, Italian sovereign bonds sold exclusively to retail investors, has thus helped to achieve the government’s goal of increasing the share of Italian government debt held by residents.
Strong demand for BTP Valore coincided with the upward swing in interest rates. In addition to higher interest rates, favourable tax treatment encouraged savers to shift some of their bank deposits into the bonds, particularly as Italian banks have been relatively slow to pass on the benefits of higher rates to depositors.
However, strong retail demand is unlikely to be enough to replace the gradual decline in the ECB’s holdings of Italian government bonds amid still rising government debt. Deposits held in Italian banks of EUR 2.03bn as of Q1 2024 are mainly overnight deposits, with around 24% having agreed maturities or being redeemable at notice. This is below previous highs of around 36% reached in 2012/13.
If depositors were to shift their current savings held as overnight deposits into BTPs Valore to a level similar to the 36% highs of deposits with agreed maturities or being redeemable at notice, they would absorb around EUR 251bn of additional government debt. But this remains well below current central bank holdings of around EUR 674bn, so demand from foreign investors will remain crucial.
Demand for Retail Bonds Follows Similar Trends in Other European Countries
Retail sovereign bonds, particularly in countries with high debt levels, are important. The first three issues of BTP Valore in June and October 2023, and February 2024, raised around EUR 54bn.
Retail demand for sovereign debt has also been high in other euro area countries. At the start of 2022, Belgium reintroduced medium and long-term State notes, which saw record demand of EUR 21.9bn in September 2023. Similarly, in March 2023, Croatia issued around EUR 1.3bn of bonds directed at retail investors while Portugal’s retail demand held in household-targeting saving certificates peaked at EUR 34bn in October 2023.
In the first half of this year, however, retail demand across Europe started to slow.
The latest issue of BTPs Valore resulted in EUR 11.3bn of funds raised, well below previous issues but still exceeding the Italian finance ministry’s expectations. At the same time, an offering of Belgian retail bonds in March drew demand of just EUR 500m, a fraction of the demand seen in September 2023.
Large pools of domestic investors can help reduce reliance on more volatile foreign investors. Still, the need to address structural fiscal pressures, implement reforms and enhance investment to raise potential economic growth while economising on public expenditure remains key.
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Alessandra Poli is an Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH. Eiko Sievert, Senior Director at Scope and primary analyst on Italy’s sovereign rating, contributed to writing this article.
