ECB expected to buy €12bn Irish sovereign bonds

The European Central Bank will buy about €12 billion in Irish sovereign bonds in its quantitative easing campaign to spur growth and prices in the euro zone.

Although German criticism of the endeavour intensified yesterday, European shares delivered their biggest weekly gain in more than three years as investors cheered the ECB plan.

The QE package continued to fan the euro’s slide against the dollar as it fell in a matter of hours through $1.13, $1.12 and then to $1.1115, its biggest daily drop for more than three years.

Analysts at UBS investment bank in London estimated that the ECB might buy some €11.3 billion in Irish bonds.

While the Central Bank of Ireland had no comment on the UBS assessment or on the likely scale of Irish bond purchases by the ECB, in Irish official circles the figure mentioned is some €12 billion.

Most of the interest the Government pays on this debt will return to the Exchequer by way of dividends from the Central Bank, which will hold bonds for the ECB. Estimates point to an annual boost to the public finances of between €300 million and €500 million by the end of the 19-month QE campaign.

Bank lending

Beginning in March, the ECB will spend €60 billion per month in new money on euro zone sovereign bonds until the end of Sepember 2016. The aim is to redirect money held in such bonds into new bank lending and other new investments.

Purchases made under the €1.14 trillion scheme will be in line with each member state’s capital in the ECB when the capital of non-euro counties is excluded in a rebasing exercise. In the State’s case the capital share is 1.6 per cent.

Bonds with a maturity between two years and 30 years are eligible for the scheme. The ECB will buy no more than 25 per cent of bonds from any single issue of debt and the limit on all purchases is 33 per cent of the total of any country’s debt.

UBS said the State has €92 billion in outstanding bonds in the relevant categories, with a €19 billion pool of bonds in play under the capital key.

However, the bank noted that the ECB is estimated to hold almost €8 billion in Irish bonds acquired under the earlier Securities Market Programme scheme under which it bought bonds issued by stricken euro zone countries early in the debt crisis.

“In Ireland, purchases may be reduced by as much as €7.7 billion of the implied pro rata holdings of €19 billion,” said UBS.

Separate category

There had been concerns in Government circles that large holdings of Irish bonds in the Central Bank following the deal to scrap the Anglo Irish Bank promissory note scheme would curtail the State’s benefit from the QE scheme.

Such bonds are in a separate category, however, as a large proportion have maturities in excess of 30 years.

In a note, Goodbody Stockbrokers chief economist Dermot O’Leary said the decline in Irish borrowing costs in advance of and after the ECB unveiled the QE package presented an opportunity for the National Treasury Management Agency to lock in low funding costs well into the future.

“Ireland could potentially sell 30-year bonds at a yield close to 2.2 per cent. It is worth noting that Irish five-year yields were at this level as recently as November 2013,”

Mr O’Leary said. Pension consultants Mercer said the QE plan has added to uncertainty in the world of pensions.