Tuesday, March 22, 2011

One domestic consequence of default

With talk of “unsustainable debt” and “inevitability of default” growing ever louder I think the following graph from a previous post is important.  While much of the noise has focussed on the liability side of our ailing banks this looks at some of the assets they hold, and in particular assets issued by Irish residents. 

Irish Securities held by Covered Banks

Irish exposure to Irish debt is getting ever larger.  The full implications of a banking- and/or sovereign-debt default need to be examined and this is something that those who are shouting loudest tend to ignore.  Here is the blurb that went with the graph.  This is a point that should not be lost.

The covered banks are holding more and more debt securities issued by Irish residents.  These have increased from €11 billion in January 2008 to €84 billion in January 2011.

Everything is going up.  The increase in “private sector” bonds here are mainly those issued by NAMA in return for the transfer of developer loans from the banks.  Bonds by “monetary financial institutions” are bonds issued by the covered banks themselves.  The almost vertical rise seen in January 2011 is because the banks issued €17 billion of bonds to themselves to use as collateral with the ECB.  As we saw previously, the remainder of this category is €15 billion of bonds the covered banks hold in each other.  Burning these bondholders will just mean more promissory notes will have to be issued.

I cannot really explain the rise in the holdings of “general government” bonds by the covered banks.  It seems unusual that at a time when the State was pumping billion to prop up the banks, these very same banks were using €11 billion to buy bonds issued by the State.  It appears they now hold about one-eighth of Irish government bonds in issue.  Guess who will be hit if there is a sovereign default??

Some insight into the banks’ buying of Irish government bonds is given in this May 2009 article from the Sunday Business Post.

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