Eligible Irish bonds a constraint on extending QE

The ECB has flagged the possibility of adjusting its asset purchase programme (QE) to  boost economic activity and move inflation closer to target. At the moment the Bank is buying around €60bn of assets a month, with over €50bn in the shape of Government bonds, with the intention of continuing until at least September 2016. One practical concern regarding extending that timeframe  is the supply of eligible bonds and that may well become more of an issue in the Irish market as we move through 2016.

The nominal value of Irish Government bonds  currently outstanding is €125bn, with some €95bn falling within the maturity range eligible for QE (over 2 years and under 30 years). Bonds yielding below -0.2% are also excluded under the current criteria, which affects a number of countries, notably Germany, but not Ireland. The ECB can buy up to 33% of bonds issued, so that implies an Irish figure of  €31bn.

QE started in March and purchases in the Irish market have averaged €0.8bn a month, bringing the total to €6bn at end-October. Plenty of scope left, therefore, except that the ECB and the Irish Central Bank  already hold Irish bonds, and that figure is included in the QE calculation. The Central Bank  acquired €25bn of bonds as part of the Promissory note deal, with €7bn  maturing within 30 years. The ECB’s holdings arose from the Securities Market Program , which operated for a time in 2010, and amounted to €9.7bn at the end of last year. We do not know the current position or how many will mature over the next two years but from the average maturity (4.5 years) it would seem reasonable to assume that  €7bn would redeem after 2017 and hence fall within QE eligibility.

On that basis the ECB and the Irish Central Bank may own an additional €14bn of Irish eligible bonds, bringing the total to €20bn  when adding the QE purchase to date. Absent any other changes that would mean that the ECB could buy an additional €11bn, which at the current pace of purchase implies a maximum of 14 months, taking us to the end of December 2016 or just three months beyond the current timeframe.

On the face of it, then, the scope for extending Irish QE is very limited, although two factors are likely to give the ECB some leeway, albeit not a great amount. The first is additional supply from the NTMA, with perhaps  €10bn issued in 2016, which would boost the eligible bond total by that amount if over 2 years in maturity. That would allow €3.3bn in additional QE , an extension of four months.  In addition , the Central Bank is required to sell at least €0.5bn of its bond holding next year and any sales would leave greater room for ECB buying of bonds held by the market. On that basis Dame Street may well sell far more than the minimum.