UPDATE 1-Foreign investors sold 51.5 bln euros of Italian govt bonds in March

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MILAN, May 20 (Reuters) – Foreign investors cut their holdings of Italian government bonds by 51.5 billion euros ($56.5 billion) in March, when measures to stop the coronavirus pandemic paralysed economic activity across Italy.

In its monthly balance of payments publication, the Bank of Italy said foreigners had reduced their overall holdings of Italian securities by 63.8 billion euros, adding that government bond sales were mostly of longer-term debt.

Italy, which has a 2.4 trillion euro public debt pile and an economy that has been stagnant for decades, is one of the countries worst hit by the pandemic.

Government spending to counter an economic contraction of up to 13% this year is set to inflate Rome’s debt to nearly 1.6 times national output, raising concerns over its sustainability.

Analysts at UniCredit highlighted in a recent note that Italian debt had failed to outperform other euro zone government bonds despite relatively larger purchases of Italian paper by the European Central Bank.

“This is an important signal that as well as issuance, the ECB also needs to absorb selling activity by current investors,” they wrote in a note.

Domestic banks have provided additional support to the market by increasing their holdings of Italian government bonds — by 13.5 billion euros in March alone.

In an effort to finance a budget deficit set to reach 10.4% of gross domestic product this year, Italy is trying to funnel a larger share of private savings into its public debt.

Rome has raised 10 billion euros from small savers so far this week with a new BTP Italia inflation-linked bond which it says will be used to fund healthcare and recovery spending.

The offering for ordinary Italians, whose demand is met in full, ends on Wednesday, followed by a sale to institutional buyers on Thursday.

$1 = 0.9139 euros
Reporting by Sara Rossi and Valentina Za; Editing by Catherine
Evans