Monday 24 October 2016

Quarter of Irish bonds now owed to central banks

Published 09/06/2016 | 02:30

European Central Bank HQ in Frankfurt. Photo: Ralph Orlowski
European Central Bank HQ in Frankfurt. Photo: Ralph Orlowski

About a quarter of all Irish government bonds are now owed to central banks in either Dublin or Frankfurt - dwarfing even the massive stake built up during the crisis by US investor Michael Hasenstab, figures published yesterday indicate.

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The massive holding is the result of a combination of bond buying by the European Central Bank (ECB), under its quantitative-easing programme, along with the bonds received by the Central Bank of Ireland three years ago as a result of the complex deal to scrap the controversial Anglo Irish Bank promissory note.

Data published by the ECB at the end of May shows the Eurosystem has purchased €12.166bn of Irish government bonds under its QE programme, which is aimed at stimulating economic activity inside the euro area. The ECB structure means those purchases are made by national central banks and Frankfurt.

That holding alone is more than the around €8bn of bonds amassed by Franklin Templeton's Michael Hasenstab when he famously cornered the market in Irish sovereign debt in the pit of the euro crisis, raising eyebrows because of the scale of purchases. He later cashed out of the investment at a massive profit.

Purchases under the QE programme are in addition to the €21.5bn of government bonds already held by the Central Bank of Ireland since the scrapping of the Anglo Irish Bank promissory note, a complex deal that left taxpayers owing an initial €25bn to the bank, a figure that has since reduced. The nominal value outstanding of all Irish government bonds was €121bn in April, according to the Central Bank. That indicates that about a quarter of the total debt is owned to the Central Bank, even though it is expressly forbidden to lend directly to the State.

The massive scale of bond buying has driven interest costs to all-time lows this year.

Yesterday, the ECB entered a new phase in its QE drive, plunging into the corporate bond market on for the first time, where its expected to spend €5bn a month.

Early purchases included bonds issued by Anheuser-Busch, the world's biggest brewer; Telefonica, Spain's biggest telecommunications company; Siemens, Europe's biggest engineering company; Assicurazioni Generali, Italy's biggest insurer; and French carmaker Renault, according to people familiar with the matter, who aren't authorised to speak about it and asked not to be identified.

High grade Irish bonds issued by the DAA, ESB, CRH and Ryanair, among others, are also eligible to be purchased.

In the run-up to the programme, borrowing costs tumbled, with average yields for euro notes down to 0.98pc on Tuesday, the lowest in over a year, according to Bank of America Merrill Lynch index data.

The ECB's investment-grade corporate bonds are part of the overall €80bn-a-month purchase programme. (Additional reporting Bloomberg)

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