Wednesday, May 4, 2011

Irish Government Bonds

We have looked at the ownership of bank bonds a number of times using the data compiled by the Central Bank.  Over on, Prof. Karl Whelan gives a useful summary of some of the problems that arise when interpreting this data (Who Owns Senior Irish Bank Bonds?).  We examined some of this issues here.

A similar, and now very much related question, is who owns Irish government bonds?  As with the bank bonds this is generally a difficult question to answer.  According to the NTMA there are €89.5 billion of Irish government bonds outstanding.

We can get a partial insight into these from the Central Bank’s Money, Credit and Banking Statistics.   Although much of the focus has been on the liability side of the balance sheets of the covered banks, here we look at the assets.  We have previously looked at this graph here and here.

Irish Securities held by Covered Banks

The green line representing “private sector” bonds is actually mainly those issued to the banks by the National Asset Management Agency (NAMA) in return for the €71 billion of developer loans.  The promissory notes are not in this graph.  They are considered a loan to government.  Details of them can also be found in the “Loans to Irish Residents” graph here.

The blue line for monetary financial institutions is largely the covered banks themselves.  As the posts above point out they didn’t get a huge appetite for bonds in each with the vertical rise in January of this year.  This increase was due to banks holding bonds in themselves.  These “self-held” bonds were issued for three months but it looks like they are being renewed rather than retired.  The remaining €15 billion of bonds from Irish monetary financial institutions remains noteworthy.

Of central interest here is the line showing the holdings of the covered banks of bonds issued by the Irish government.  This is now just over €10 billion.  The covered banks hold about one-eight of Irish government bonds.

Should they hold more?  It might seem unusual to suggest this at a time when a sovereign default is considered “inevitable” by some.  As we saw recently Irish bond yields soared a few weeks ago and the 10-year yield has remained around 10.5%.  A higher yield means a lower price.

Debt total and ratios are usually calculated on the face or nominal value of the debt instrument in issue.  This can be different from the market value.  Although Ireland has nearly €90 billion of bonds outstanding the market value of these is lower.  If the entire market was liquidated it might be possible to buy all this for €80 billion, or maybe €75 billion, or maybe lower.  Is there any convenient way of knowing what the aggregate market value of Irish bonds are?

Anyway, should we not encourage the banks to buy more of these bonds and prices below the nominal value.  In fact, should the country not be doing it?  The NPRF still has around €10 billion in assets that haven’t been used to recapitalise the banks.  The NTMA also has €22 billion of cash in various accounts. 

Why not use some of this money to buy Irish government debt now at reduced prices instead of waiting until maturity and having to repay the full amount?  It would offer a better return than pouring it into the banks!

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