Ireland faces ECB bond-buying guillotine if Draghi doesn’t budge

The European Central Bank may run out of room to buy Irish Government bonds within weeks under its massive €1.7 trillion quantitative easing programme if its president, Mario Draghi, does not move on Thursday to ease the terms of the plan, according to analysts.

Cantor Fitzgerald’s head of fixed income strategy in Dublin, Ryan McGrath estimates that the ECB, Irish Central Bank and other euro-zone monetary authorities currently hold about €31.34 billion of eligible Irish bonds under the quantitative easing plan. That equates to 97.5 per cent of the maximum amount the ECB can buy, based on strict conditions attached to the programme.

On that basis, the ECB only has room to buy a further as little as €790 million of Irish bonds this month, just 80 per cent of the amount of the State’s securities it purchased in November.

Limit

“If the ECB does nothing, Ireland’s sovereign bonds could be out of the QE programme as early as the middle of this month, which would put it at a disadvantage to every other country in the euro zone,” said Ryan McGrath.

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Portugal, which along with Ireland succumbed to an international bailout during the financial crisis, faces a similar predicament to Ireland. Still, Mr McGrath and many other analysts expect the ECB to lift its current limit on bond purchases at its governing council monetary policy meeting on Thursday.

Crucially, Mr Draghi is also widely expected to announce on Thursday that the quantitative easing programme, which it started early in 2015 to try and reignite inflation and growth across the euro zone, will be extended for six months beyond its scheduled completion in March 2017. If the extension is not agreed, it could spark a sell-off in European bonds, which would send market interest rates, or yields, soaring, according to economists.

Events

Euro-area bonds have, on the whole, have had limited reaction to series of political events this year, including the UK’s decision to quit the EU, Donald Trump’s victory in the US presidential election and Italy’s rejection on Sunday of constitutional reform in a referendum that brought down the prime minister. An extension of the ECB programme would help keep the bond market relatively calm as Europe faces a period of elections in the Netherlands, France and Germany next year.

Currently, the ECB is restricted to buying no more than 33 per cent of eligible bonds from a single state and 33 per cent of any single bond in issue. The figure falls to 25 per cent for bonds sold under new rules in January 2013 that allow a majority of investors to agree a debt restructuring if a state finds itself in financial trouble which is forced upon all holders of the bonds.

These bonds have so-called collective action clauses, or CACs, which avoid a situation where holdout bond investors can avoid losses being inflicted on them.

Mr McGrath expects the ECB to increase to 50 per cent the amount of eligible bonds it can buy from a euro-zone state or under a single bond in issue.