It appears Mario Draghi, who has done more as ECB president to slash Irish borrowing costs than anyone in recent years, has realised he may soon run out of rope.
The ECB limited the purchase of Irish – and Portuguese – bonds under its quantitative easing programme last month. With almost a year of its QE programme left, the ECB is concerned about nearing its own limit of holding a third of a country’s eligible bonds for the programme, Reuters reported during the week.
The issue arose when the ECB increased its monthly euro zone purchasing spree to €80 billion in April, from €60 billion. While this should have seen its Irish government bond purchases rise by about 50 per cent to €1.24 billion last month, it only increased by a third, to €1.08 billion.
On the face of it, you wouldn't think there'd be a problem. The notional total amount of eligible Irish debt for the QE programme stands at €92 billion, and the ECB has only snapped up the nation's debt with a market value of €11 billion. However, Owen Callan, a bond analyst with Cantor Fitzgerald, estimates that in reality there are about €50 billion of real eligible bonds.
We’ll spare you most of the science bit behind the calculation. But the ECB has restricted itself from buying debt of less than two years in duration. And it seems that it is currently either unable or unwilling to buy Irish bonds that mature between 2018 and 2020 – of which there are €43.3 billion outstanding.
Callan forecasts that the ECB will own about 30 per cent of the really eligible Irish bonds by year end, leaving it with little room for manoeuvre before the programme ends next March.
The NTMA could engage in a bit of self-help and offer to switch investors in bonds maturing in the next few years into longer-term notes. The problem here is that most of these bonds were bought at yields of 3-4 per cent and they’d be moving into, say, Ireland’s 2022 bonds that only offer a yield of 0.2 per cent.
In effect, Draghi may have killed this trade.
But with many economists predicting that the ECB will extend its QE programme beyond March 2017, something will have to give.
Having increased its buying limit to 33 per cent in September from 25 per cent at the start of the programme, maybe the man dubbed “Super Mario” will relax the rules again?
