AIB boosts holdings of Irish bonds to €7.7bn
Figure represents 7pc of bank’s total assets and 70pc of its capital
STATE-controlled bank AIB increased its holdings of Irish government bonds by nearly €2.5bn last year as the National Treasury Management Agency (NTMA) ramped up debt issuance to fund pandemic spending.
The bank, in which the Finance Minister holds a controlling 71pc stake, raised its holdings from €5.3bn to €7.7bn – a 45pc jump – according to its 2020 annual report.
The figure represents 7pc of AIB’s total assets and about 70pc of its total capital, up from 5pc and 50pc respectively at the end of 2019. Bank of Ireland, where the State has a minority shareholding of 14pc, also increased the Irish government bonds on its balance sheet last year, but by a smaller amount than AIB.
Bank of Ireland increased its holdings by €1.8bn, bringing its total to €7.6bn, or 5.7pc of total assets.
The increases raise questions about whether the Government and domestic banks could re-establish the so-called sovereign-bank “doom loop” that contributed to Ireland’s debt crisis in 2011.
Banks hold government bonds because they count as risk-free assets and require no regulatory capital to be held against them.
As banks can borrow from the ECB at -1pc, even Irish debt issued at slightly below zero represents a profitable trade.
However, if the sovereign issuer’s creditworthiness weakens, those bonds can lose value, leading to potential financial trouble for the banks.
When the government is a shareholder, the problem is multiplied.
Governments across Europe have been increasing their debt issuance in the last year to raise money to cover expanded budget deficits to help cope with the cost of Covid-19. European banks have been buying it up, collectively adding €140bn to their balance sheets, according to the European Central Bank.
French and Italian banks now hold record amounts of domestic sovereign debt, far higher proportionally than Ireland’s banks.
The Irish Government has made spending commitments over 2020 and 2021 of €38.5bn to pay for public health expenditure, business subsidies and social welfare payments, according to the Department of Finance.
The NTMA is raising up to
€20bn this year to cover the tax shortfall, with €7bn of debt already issued in the first quarter.
The European Central Bank is itself a major buyer of this debt in the secondary market to ensure yields stay low so governments can finance their deficits.
The ECB bought more than €2bn of Irish sovereign debt in February and March of this year alone.
This intervention has helped dramatically reduce the cost of State funding, making it effectively free, and allowed the NTMA to extend the payment terms of much of its debt load. The State has no debt payment due dates in 2021. Overall, banks and central banks hold 45pc of Irish Government debt, up from 36pc at the beginning of 2020.
AIB wants permission to buy back some of the State’s stake in the bank. The bank has asked shareholders to approve a transaction with the Finance Minister that would allow AIB to buy back up to 4.99pc of its shares. At the current share price, AIB could spend nearly €300m to redeem them.