Last week has seen the 16th issue of BTP (Buoni Tesoro Poliennali) in Italy, by the Italian Treasury: announced on the 15th May, the successful placement was aimed to finance measures against Covid-19.
There are several reasons why it was warmly received by retail and institutional investors: it is inflation linked, it has a floor and the annual coupon rate guaranteed is fixed at 1.4% with a loyalty bonus of 0,8%.
But let’s take a deeper look on the technical aspects.
BTPs Italia are debt instruments issued by Italy to finance its debt: they are Government securities, which differ from Treasury Bonds (BTPs) because linked to Italian Inflation.
The link to the inflation is particularly attractive for investors, as it provides protection for an increasing in the level of prices in Italy during the maturity of the security. Consequently, both the semi-annual real coupons rate and the principal are revalued linked to inflation (measured by ISTAT), though the FOI national index ex-tobacco. In other words, the principal is revalued every six months and the coupons always yield a costant minimum return in real terms.
To put it better…
Firstly, Index coefficient (IC) is calculated as the ratio of FOI Index in the day and month of the payment on the FOI measures 6 months before:
Then, the coupon at each payment date will be calculated as:
At every payment date, the coupon is calculated as shown in the equation above. The annual real coupon rate is divided for two, then multiplied for the principal which multiplies the maximum between IC (the index that measures whether there is inflation) and 1. As said early, in case of deflation (IC less than 1), there is a floor fixed at 1,4% and it explains better why there is a 1 in the formula. Not only the interest rate, but also the principal is revalued based on the inflation in the previous six months.
In the view of above, it is pretty clear why it is appealing for investor: for fixed coupons (not linked to inflation), payments could value less than the expected if cost of life arose.
Moreover, BTPs Italia usually have a maturity of 4, 6 and 8 years but this time, for the first time in history, the maturity is fixed of 5 year (till 26th of May 2025). The minimum denomination is of € 1.000 for retail and €100.000 for institutional investors, with a direct placement on the MOT (by Borsa Italiana), price at par, with a single repayment at maturity and a tax rate of 12,5% (as every Government security).
The amount sold was a record: only in the first day of placement (18th May 2020) the BTP Italia gained 4 billion of euro, more than what was raised in October 2019.
The first phase of placement was reserved to retail investors for a value of 13,997.606 million of euro and it lasted 3 days, meanwhile Thursday was for institutional investors and collected 8,300.000 million of euro, only the 42% of the demand. This could probably be explained by the fact that retail investors are less influenced by markets volatility and tend to have bonds till the maturity date.
Some have argued that to finance itself, the government could choose the European ESM (known as “Mes”) instead of finance its debt thought bonds. The EMS facility offers a lower rate of 0,1% against the 1,4% inflation linked rate and loyalty bonus offered by BTPs Italia, but it asks to address the credit line (directly and indirectly) only for healthcare, cure and prevention related costs due to the Covid-19 crisis. The amount of the credit line is of 240 billion of euros, for a maximum of 2% of the GDP 2019 for each member state that ask for and so, for Italy, about 36 billions.
As a Bloomberg research said, for the same amount of money, Italy would pay 22,3 million of euro yearly interest and repaid it in 10 years instead of 5, so wasting (with BTPs) 1,5 billion of euros.
The best solution lies in a combination of the two: even with very low conditions of the ESM for Covid (healthcare, cure, prevention), with BTPs Italia, Government will use these funds for a total of more than 22 billion of euros not only for healthcare but also for the economic recovery. At the same time, the ESM could give Italy resources at a very low rate compared to those that Italy could raise alone (considering also Italy’s rating) and without asking for a debt restructuring.
Although it is said that retail owned government securities, Bank of Italy says that this is true only for the 3% of Government securities. But this time it was different: more than half of the total BTPs Italia offer was subscribed by retail and maybe it represents a kind of solidarity between citizens in this difficult time.