Monday, February 28, 2011

Bonds Issued by the Covered Institutions

When the December release of the Central Bank’s Credit, Money and Banking Statistics were released we examined the bonds issued by domestic banks in this post that garnered some attention.  The January release published today allows us to explore patterns in the amount of bonds issued by the six covered institutions.  This was previously not possible as a breakdown by covered and non-covered domestic banks was not provided.

Here are the total debt securities issued by the covered banks.  These graphs just give the total amount in issue by the covered banks.  It does not show the difference between guaranteed and unguaranteed debt.

Covered Bank Bonds

After showing an alarming decline in the last six months of 2010, it seems that the amount of bonds issued by the covered institutions increased by about €17 billion in January.  Technically this is true but it doesn’t mean we have another €17 billion of bondholders to “burn”.

This see why, here’s a breakdown of who holds the €79.1 billion of total bonds in issue from the covered banks.

Holders of Covered Bank Bonds

The big change is seemingly in holdings of covered bonds by Irish residents.   These figures now suggest that nearly two-thirds of the bonds are now held by Irish residents.  We estimated that this was just over one-half a month ago.  Have Irish residents suddenly got a new appetite for owning these bonds?

In general we cannot say who actually owns these bonds.  Some have tried to suggest that these bonds are owned by Irish credit unions and pension funds.  We cannot tell from the figures available.  However, we can make a fairly solid judgement on who owns the increased €17 billion in bonds that appeared in January.  It is the banks themselves!  See this report:

IRISH BANKS are issuing bonds to themselves under the Government guarantee to borrow cheaply from the European Central Bank and to avoid drawing more heavily on emergency lending from the Irish Central Bank.

Four banks issued bonds worth €17 billion to themselves last month under the Government’s extended guarantee, the Eligible Liabilities Guarantee, to use as collateral to borrow from the ECB.

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

So while this graph of the residency of the owners shows a huge jump in January it is due to some balance sheet acrobatics on the side of the banks.

Ratio of Covered Bonds held by Irish Residents

One statistic that remains is the hugely reduced possibility of making external bondholders “share the burden”.  In August 2008 holdings by residents outside of the Eurozone (mainly London) held €68 billion in bonds issued by the covered banks.  The January 2010 figures show that this is now €19 billion – a reduction of €49 billion. Most of this money was repaid in full, including €750 million to bondholders in Anglo Irish Bank a few weeks ago.  The repayment of these bonds is part of the reason why Irish banks have turned to the ECB for emergency funding.  Next we turn to the other reason.

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