Saturday, February 9, 2013

What’s next on our agenda with the ECB?

Patrick Honohan’s recent appearance at the Oireachtas Finance Committee included the following exchange.

Deputy Kevin Humphreys:  “The ECB purchased significant amounts of distressed euro sovereign debt in the secondary bond market in 2010 and 2011 through the security market programme. I understand that approximately €200 billion worth of bonds are being held to maturity. It is estimated that between €15 billion and €20 billion of Irish bonds were bought, mostly at distressed prices well below par.

The Barclays Capital report of January 2012 stated that about €19 billion of Irish Government bonds were being held by the ECB. Is that the correct sum?

We heard a lot about how Franklin Templeton made huge returns by buying Irish bonds at low prices. It is difficult to estimate the profits the ECB will make on the capital proportion of these bonds bought through the SMP but it could be in the range of €3 billion to €5 billion. The problem is, and I asked about this in private session before and was given short shrift, we do not know what the ECB profits may be because the ECB will not tell us. The Governor sits on the board, however, so does he know and will he tell us?”

Patrick Honohan:  “I know how much Irish paper is held by the ECB in the security market programme. I could try to calculate the profits.”

Kevin Humphreys:  “Am I far off in my calculations?”

Patrick Honohan: “I would steer the Deputy away if I thought he was. I think that more information about the SMP holdings will be provided. The SMP has terminated as a programme and the reasons of market sensitivity that caused it not to be disclosed would fade away. At present, however, I am not at liberty to give out those numbers.”

Here is the set of Irish government bonds that was in issue around the time the Euro System of Central Banks (the constituent elements of the ECB) were making these purchases under the Securities Market Programme in the second half of  2011.

It is likely that the ECB purchases were focussed on the short end of the market.  The first two bonds on the list have been redeemed.  The next on the list is the bond maturing on the 18th of April coming.  A bond swap last July reduced the amount outstanding on this bond which now is just over €5 billion.  The ECB are likely to be significant holders of this bond and also of the remaining €8 billion of the January 2014 bond.

The November 2012 Eurogroup meeting included the following agreement:

A commitment by Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013.

Can we get this too?

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