Friday, January 30, 2015

On the 25/33 QE limits

Following the announcement last Thursday that the ECB was going to re-commence buying government bonds in March, but this time as part of a quantitative easing (QE) rather than sterilised programme, there was discussion about the impact the limits on central bank holdings of government bonds would have on the ability of the Central Bank of Ireland to purchase Irish government bonds.  The reason for this is that the CBoI already holds a significant amount of Irish government bonds.  This PQ answer from the Minister for Finance adds some much needed clarity.

The ECB has indicated that its asset purchase programme in relation to sovereign bonds will be restricted to bonds with a remaining maturity of greater than 2 but less than 30 years.  It has also indicated limits on the Eurosystem's holdings of any one issuer's bonds, taking into account existing holdings.  These limits refer to the same 2 to 30 year maturity window.  To be precise, holdings within the 2 to 30 year remaining maturity window will not exceed 33 per cent of an issuer's tradable bonds within the same window.  The majority of the bonds acquired by the CBI in exchange for the Promissory Notes have more than 30 years remaining.  Currently, this is the case for €19 billion out of the original €25 billion nominal issuance. Therefore, the holding of these bonds by the CBI will, in practice, have no impact on the amounts that can be purchased by the CBI.  While other bonds within the 2-30 year maturity window that are already held by the CBI and other National Central Banks will be taken into account for the purposes of calculating the amounts that can be purchased, I understand that this still leaves ample room for participation by the CBI in the asset purchase programme.

I understand that the Bank's disposal strategy for its Special Portfolio - those bonds acquired following the liquidation of IBRC and the exchange of the Promissory Notes remains as previously announced, i.e. it will continue to dispose of the bonds as soon as possible, provided conditions of financial stability permit.  Disposals may or may not impact on the purchasable amounts under the asset purchase programme depending on the maturity of the bonds sold.

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