Buying Bonds for Love of Country? ~ MAKE MONEY BLOG$

LONDON—Unable to issue debt at affordable prices to professional investors, European governments and banks increasingly are turning to their citizens and customers for help.

Through post offices and bank branches, governments and financial institutions in struggling euro-zone countries are selling more bonds directly to individual retail investors.

Borrowing a page from wartime finance playbooks, cash-strapped governments are cloaking bond sales in patriotic mantles, with names like "National Solidarity Bonds." The bonds, while hardly panaceas for Europe's crisis over sovereign debt, are attractive for governments and banks because they tend to carry interest rates that are considerably lower than what the issuers would have to pay to attract risk-averse institutional investors in today's markets.

Irish, Spanish and Italian governments are among those that are increasingly leaning on debt sales to individual investors to help meet their financing needs. Italy's finance ministry said in late October that it is working on a way to enable individuals to easily buy government debt online.

Investors are shunning these countries' debt, driving up yields and making it much more expensive for them to borrow. Yields on Italy's 10-year bonds on Wednesday breached 7%, the point at which other European countries recently have sought international bailouts, but retreated slightly on Thursday.

"There is a potential there to absorb a decent size of the debt requirement," especially in a country like Italy where household savings rates are high, said Silvio Peruzzo, an economist at Royal Bank of Scotland. The deals are helpful for financially shaky issuers because the cost of issuing debt to retail customers "is usually below-market," he added.

But some skeptics worry that governments and banks, after sophisticated institutional investors shunned them, are instead dumping debt on individuals who don't fully grasp the risks.

"They're hoping they can hoodwink people into buying these things at cut-rate rates," said Michael Ben-Gad, an economics professor at City University London.

Such bond sales aren't new, and other governments also have retail-targeted bonds, such as savings bonds sold by the U.S. that have mature in periods of up to 30 years. Those bonds, which account for a small part of the government's funding needs, have interest rates that generally are pegged to what the bonds yield in the market, and some securities currently offer annual rates of about 3%. Patriotism also has been a selling point in the U.S.; during World War II, the Treasury sold so-called "War Bonds" that offered a 2.9% annual interest rate over 10 years.

But today, such retail bonds represent a growing portion of some European governments' and banks' financing plans.

A number of Spain's autonomous regions have begun selling "bonos patrióticos"—patriotic bonds—to their citizens. In Catalonia, one of Spain's largest and most indebted regions, proceeds from two retail-targeted bond sales this year will cover 71% of the region's funding needs, said a spokeswoman for Catalonia's economic secretary.

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Irish, Spanish and Italian governments are among those that are increasingly leaning on debt sales to individual investors to help meet their financing needs.

The government is running ads urging citizens to take advantage of an ongoing sale of up to €4 billion ($5.42 billion) of bonds with one- or two-year maturities. The bonds offer interest rates of up to 5.25%—well below the 6.75% that similar bonds yield in the markets, according to traders. The bonds are "good for you, good for the future," the ads say. The bonds are sold through Spanish banks, whose employees peddle the products by phone and promotional mailings.

Albert Carreras, Catalonia's secretary of economy and finance in its new government, said the widespread interest in the bonds shows the region's residents have a better grasp of Catalonia's finances than the international markets do.

"Our citizens see that since we came [into power], we are committed to paying our debt, increasing revenue and financial sustainability," he said.

Ireland, which received an international bailout late last year, drummed up a record €3.4 billion last year through retail bond sales, representing about 14% of its total long-term borrowings, according to its National Treasury Management Agency. That was up from about 5% the prior year. In the first nine months of 2011, the government generated €1.2 billion through the sales and didn't sell any bonds through auctions aimed at institutional investors.

Ireland lured some of that new money with an appeal to patriotism. In April 2010, it launched National Solidarity Bonds, which pay nearly 4% annual interest rates over their 10-year lives. The bonds proved a hit. In the first 10 months, roughly 18,000 customers bought about €375 million of the bonds, according to the NTMA. This February, the agency introduced a four-year Solidarity Bond with a slightly lower interest rate. The bonds are on sale in post offices around the country.

Ireland is lucky to be able to borrow for less than 4% a year. Its 10-year government bonds currently yield about 8%.

Brian O'Neill, a spokesman for the NTMA, said the Solidarity Bonds are a good fit for retail investors because they can be redeemed at any point with the principal fully repaid. That is in contrast to normal government bonds, where an investor would have to accept market prices in order to sell the instruments early. "That's a major difference," Mr. O'Neill said.

Ireland also is using instruments known as "Prize Bonds" to entice customers. The bonds, which sell for €6.25 apiece, don't generate interest. But each bond is entered into a weekly lottery with cash prizes, including a €1 million jackpot once a month.

"All Prize Bonds have magical power. They can come to life," an announcer intones in a 30-second TV commercial. The spot depicts an animated bond sprinkling golden dust around a house and outfitting it with new furniture, artwork and a minivan.

In Spain and Italy, banks are largely locked out of the capital markets and instead have been rushing to sell bonds to their customers.

This fall, two of Spain's largest banks, Banco Santander SA and Bankia, have launched sales of up to €12.5 billion of debt instruments, aimed at retail customers. Bank of Spain data show that Spanish families purchased €21 billion worth of bank bonds in the first half of the year, compared to €25 billion for all of 2010 and €17 billion in 2009

In Italy, selling bonds to bank customers has long been a popular way of drumming up funds. The bonds play a role that's similar to certificates of deposit in the U.S. The top five lenders have issued a total of €52 billion of retail bonds to their customers so far this year—but intensifying competition has forced banks to more than double the interest rates they are offering to around 4%, according to a report this week by Barclays Capital analysts.

"We will certainly issue some more bonds, certainly through our retail networks," saidIntesa Sanpaolo SpA Chief Executive Corrado Passera. He said the bank's extensive retail distribution network means it can afford to go through next year without issuing debt in the wholesale markets.

Write to David Enrich at david.enrich@wsj.com

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