Via Barclays Capital’s Laurent Fransolet, here’s an interesting sidelight on Ireland’s sovereign liabilities, amid continued fear in the market that the government’s bailout of the banking system will increase them markedly.
Those liabilities, however, won’t be borne by Irish banks. Or, indeed, by many Irish institutions, full stop.
As Fransolet noted on Monday (emphasis ours):
In common with a number of other countries, one of the problems Ireland has faced is the limited domestic investor base for its debt. There is only limited data on who owns the Irish debt. On the domestic side, the Irish central bank has detailed data on holders… Only 15% of the debt is held domestically (the lowest proportion in the euro area), and domestic buyers have not stepped up their purchases recently, in contrast to a number of other euro area countries (eg, Spain, Portugal).
…Irish domestic banks own just €8.5bn of the debt, compared with balance sheets of about €700bn (this also looks low in the context of new liquidity rules, especially given the low funding cost of this debt at the ECB). Similarly, insurance companies and pension funds hold just €3-4bn of Irish government bonds, compared with total fixed income assets of €66bn. These low domestic holdings probably reflect the fact that for a long time, Irish debt was scarce and low yielding, and thus shunned by domestic investors. We think it also shows that in a way, there is potential for more domestic buying, even if these changes in investment policies can take time.
Although they’d have to navigate foreign demand for 85 per cent of Irish government debt first. In particular, Fransolet has tried to calculate the amount of debt bought so far by the European Central Bank’s Securities Markets Programme (click to enlarge chart, and emphasis ours):
To have an idea of who owns this external debt, we utilise a number of sources. First, we take into account the ECB Securities Markets Programme buying (SMP): in total, about €61bn of Greek, Irish and Portuguese securities have been bought by the ECB. We believe the majority was Greek debt, with the rest slightly skewed in favour of Irish debt (say 15bn to 20bn). Overall, we assume 30% of the ECB SMP buying has been in Irish debt (€18bn – the SMP likely makes the ECB the biggest single debt holder of Ireland, Portugal and Greece).
Around €12bn is held by European banks, while non-bank (although also European, probably) investors hold a further €40bn. The non-Irish, non-ECB holdings have likely been reduced by around 20 per cent, or €15bn, recently, Fransolet adds.
Although so much dependency on foreign debt (even if the ECB is hardly likely to go on strike) is perhaps less than ideal, at least Ireland will have access to cash for a while yet:
Importantly… Ireland built up a lot of cash deposits in 2008, which it could run down more than €10bn if market access remains limited/too expensive. With monthly cash deficits of about €1.5bn, limited bills redemptions (€2.75bn in Q1 11) and no bond redemption until November 2011 (€4.4bn), Ireland is not under severe pressure to issue large amounts for meeting cash needs. As such, the NTMA confirmed on 9 September that Ireland was fully funded until next June, which is our assessment as well, if Ireland decided to run down its cash balances entirely (although we suspect it will want to keep some cash buffer to hand).
Which suggests a distinct upper limit on how much the Irish situation can worsen, at least in the period before Irish banks’ ultimate — refinanced — fate becomes clear.
Related links:
Anglo Irish candour, at last? – FT Alphaville
Mmm, Irish yield stew – FT Alphaville
Charting Europe’s grim sovereign-bank loop – FT Alphaville