How Many Irish bonds can QE buy?

The ECB’s expanded  QE is due to start in March and a figure of €12bn is often reported in terms of the amount of Irish sovereign debt that the Central bank can buy. The case is not that clear-cut , however,  and the limit may be only €9bn from June.

Bonds purchased in any EA  country  under QE are subject to a number of restrictions. The first limits the share  of the total each country can buy. In Ireland that means about 1.7% of  the €60bn per month  QE target, which includes private and  EU supranationals as well as government debt. The second limits central bank buying to 25% of any issue. A third puts a  33% ceiling  on the amount of   any issuer’s debt that can be held . The latter only makes sense relative to the 25% limit if existing central bank holdings are included .

Indeed,the ECB does already own some sovereign debt, purchased under the Securities Market Program (SMP) , which stands at €144bn having fallen from over €200bn (via bonds maturing). We do not know the  current breakdown of that holding by country but the ECB did publish that data as at end-2012. At  that time €14bn of Irish government debt  had been purchased, 6.5% of the then total, which implies about €9bn today, assuming redemptions were broadly proportional over the past two years.

The Irish Central Bank also owns government debt stemming from the Anglo Promissory note. Part of that was repaid  in 2012 via the issuance of €3.5bn  of the 5.4% 2025 bond. The Bank announced it had sold a portion of that in 2013 but presumably still owns around €3bn of that issue. In addition, the Central bank received €25bn in long term bonds as part of the Promissory note deal in 2013   and again has sold a small amount, leaving €24.5bn.

Another QE stipulation is that  only bonds with a maturity  between 2 and 30 years are eligible, which in Ireland’s  case gives a current figure of €86bn. That implies  €8.5bn of central bank holdings are within that range ( including €5.5bn of the Prom note bonds) which alongside the €9bn SMP figure gives €17.5bn or 20% of the total at issue. The issue limit therefore leaves only 13% open to further purchase, which is just under €11bn

Finance Minister Noonan stated that the Central bank had ‘ample room ‘ to purchase Irish debt. However, the situation changes in mid-year as  €3bn of the Prom note bonds redeem in June 2045 (i.e. would then fall within the 30 year limit), so  from then on the CB’s eligible  holdings rise to €20.5bn or 23% of the total, implying less than €9bn could be added.

Some SMP holdings will mature over the next 18 months and the Central bank will sell some of its Prom note bonds, so giving some room for additional QE, The NTMA will also issue new debt (perhaps another €11bn this year) which  will qualify as long as it is over 2 years so raising the remaining limit for the Central bank rule. Perhaps not quite as ‘ample’ then as some think, in the short term and with more moving parts.