The Central Bank of Malta has been able to buy up €233 million worth of Malta Government Stocks in the past four months but its governor has urged local banks to further reduce their holdings.
Banks currently hold a third of all Malta government stocks, the second highest level in the eurozone. Although it is up to them to decide how much government paper they wish to hold, higher demand for domestic credit and evolving regulations regarding bank holding of government bonds may be influencing banks in deciding their level of such holdings, he said.
“Each bank sets its own optimum percentage based on the margins of their minimum capital ratios and other alternatives they have for investing their capital and depositors’ funds,” Josef Bonnici said.
“For the economy as a whole, it would be preferable if more government paper were held by retail ‘buy and hold’ investors, so that banks can focus more on providing prudent credit growth which is so essential in a growing economy.
“Furthermore given possible future regulatory changes with regard to banks’ holdings of government bonds, I believe that there is further room for reducing MGS holdings – especially by some local banks,” the governor said.
The Central Bank of Malta bought €24 million of government bonds in July as part of the ECB’s asset buying programme, bringing the cumulative total to €233 million.
In April, the CBM had calculated that it would need to purchase around €36 million a month to reach its overall target by September 2016, which means Malta is ahead – in spite of the slow start.
However, Prof. Bonnici warned that the pacing of the programme was not necessarily linear.
“The Central Bank’s cumulative purchases have recently gone above the target level, but one has to keep in mind that in the coming months, the market may go through a normal seasonal reduction in liquidity,” he said.
“Subject to any decision which may be taken by the ECB Governing Council in revising the programme, the intention presently is to complete the programme over the period as originally envisaged.”
The intention presently is to complete the programme over the period as originally envisaged
Prof. Bonnici had said in April that investors were holding on to government paper but since then, there has been a greater disposition by bond holders to sell government bonds.
“Two-way trade in the market is now more prevalent than when the programme was introduced,” he told The Business Observer.
The ECB’s asset purchase programme is aimed at injecting liquidity into the banking system – as well as dampening the holding of sovereign debt by banks, which led to the financial crisis in many countries.
The extra demand for MGSs by the public sector purchase programme (PSPP) has tended to exert an upward effect on prices than otherwise would have been the case, he noted.
“This has to be seen in the context of the whole eurozone of which Malta forms part. Malta’s sovereign yields and credit spreads are also influenced by international market developments, with the German bund being the benchmark anchor for the whole eurozone.”
Malta’s debt securities had the longest remaining maturity weighted average of all the eurozone members, at 11.03 years.
The shortest was 2.96 years in Estonia, just over the two year minimum set by the ECB.
There are currently €5 billion worth of MGS outstanding.
In March 2015, the Eurosystem started to buy public sector securities under the PSPP, with a monthly purchase target of €60 billion.
By the end of July, €249 billion had been purchased, in addition to other purchases from associated asset purchasing programmes.