The government put a brave face on the impact on its treasury operations should domestic banks reduce their take-up of Malta Government Stocks, pointing out that, once it had a Budget surplus, there would be less and less debt to cover.

The issue may not be a matter of choice. The head of the Single Resolution Board Elke Koenig is proposing to cap the amount of sovereign debt that eurozone banks can hold.

The rationale behind the move is clear: regulators are very uncomfortable with too-strong links between banks and their host governments. And with good reason. Just take Greece and Cyprus as an example of how the one can bring the other to its knees.

Unfortunately for Malta, the island would have to comply – even though the government escaped the melt-down relatively unscathed and local banks are still reporting healthy profits.

The market here has been shifting of its own accord. ‘Individuals’ held 33.36 per cent of the €5.1 billion stock of fixed rate MGS in 2014, but this fell to 29.57 per cent in 2015, according to the Treasury. And MGS held by local banks also fell, from 31 per cent to 28.54 per cent.

Let us make no mistake: MGS are still the government’s main cover for its debt, with the total amount outstanding increasing by 72 per cent since 2008.

But banks are looking elsewhere to invest their money. The percentage of local bank assets invested in MGS has been falling over the past five years, from 11.1 per cent in 2011 to 8.8 per cent now.

The problem is that banks, as any other investors, are looking for better returns in this low interest rate scenario, but this implies considering riskier investments.

Until the global financial crisis, government stocks – not just Maltese ones – were considered so safe that they do not even require banks to make provisions against them as they were seen as government ‘loans’, and like government loans, did not require security. Denominated in euro, they were lumped together as safe ‘euro risk’, but the ‘risk’ part of that equation is now viewed with deep suspicion by banks driven to bail-outs.

What options would local banks have? Their risk appetite may be lower than ever but their liquidity is higher than ever.

The sovereign debt of other member states is more risky and offers a negligible interest rate.

And the rock solid reliability of MGS meant that banks with a high loan-to-deposit ratio could afford to encourage deposits by offering good rates for its fixed rate packages. Would that have to change?

And who would take up the slack for MGS issues, not in the short term but in the longer term?

One of the major problems unique to the Malta Treasury is that big overseas players would not be interested in taking up a few million here or there. Many do not get out of bed for less than half a billion. Can we rely on non-residents and ‘others’ to keep taking up more and more?

In this low interest rate scenario, there are enough takers for local government stocks. But only a fifth of Malta’s outstanding MGS stock matures in over 15 years’ time – relatively stable given the local propensity to buy-to-hold. Over a third matures in between one and five years’ time and, Budget surplus or not, just about all of it will have to be rolled over.

In the past, the issue and take-up of MGS was so routine it was barely reported. It suited both government and banks. What would happen if that changed?