The take-up of quantitative easing in Malta reached around 55 per cent of what was needed, after a surge in the past 10 days – but Central Bank Governor Josef Bonnici urged banks to negotiate on the sale of the government paper they hold to improve this percentage.

The Central Bank needs to purchase around €36 million per month of Malta Government Stocks between March 2015 and September 2016.

This is the Maltese portion of the €60 billion worth of assets a month across the eurozone that the European Central Bank wants to purchase until inflation shows signs of approaching the two per cent level.

The ECB wants to buy €1.1 trillion worth of government bonds by September 2016 – but they must have an outstanding maturity of between two and 30 years and have yields of more than its -0.2 per cent deposit rate.

Moody’s recently reported that there might simply not be enough bonds in the eurozone that meet this criteria because yields have fallen in several member states since the QE programme was announced – and are still falling.

However, the problem in Malta is not the yield but the fact that most of the government paper is being tightly held by investors – waiting to see where their prices settles, Prof. Bonnici said.

“Other small countries are seeing a similarly slow start,” Prof. Bonnici reassured.

“Local banks hold around 30 per cent of the MGS but the Central Bank of Malta will be buying as many as possible to use up the funds from the QE programme,” he said, noting that banks in Malta had the second highest percentage in the eurozone when it came to holding sovereign debt.

The ECB is currently evaluating this issue on a eurozone-wide basis, as the holding of sovereign debt is what led to the crisis in many countries whose banks relied too heavily on sovereign paper.

“At the moment, government paper is considered to be zero-risk for banks – but there is ongoing debate in the eurozone as to whether this should be changed. This could – will – change which would reduce the attractiveness of holding government paper. This would encourage local banks to divest their holding. It would be wise of them to see whether the QE funds could help them to prepare for such an eventuality,” he said, in a not-so-subtle warning.

He admitted that the thirst for safe investment opportunities was currently being met by MGS and that alternatives would be required if the CBM took these out of the hands of banks and the public.

He made two suggestions: that secured bonds should be issued, which would be a sound and safe alternative to MGS; and that public sector corporations should issue bonds.

“Public corporations rely on the government or banks. They have never issued bonds. These two suggestions would have a big impact as they would diversity the capital market, drawing people and banks away from MGS and in turn having an impact on QE.”

The ECB (via national central banks) will only buy in the secondary market and will not be competing with other investors for new issues on the primary market. Another important point is that the QE programme will only be eligible for minimum quantities of €100,000 (nominal) per MGS so investors holding amounts less than this in any particular security cannot take advantage of this programme.

If any national central bank cannot purchase sufficient securities to fulfil its allocation, the ECB will allow substitute bond purchases in a specific list of a number of international and supernational institutions and agencies such as the Council of Europe Development Bank, the European Investment Bank, and various others.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.