FT Alphaville » Charting sovereign bond holdings across the eurozone

Charting sovereign bond holdings across the eurozone

So which European country might be seeing foreign investors fleeing its sovereign bond market, leaving domestic banks to take up the slack?

Spain of course.

Much has been made of the eurozone sovereign/banking crisis loop, especially in Spain’s case where the banks are taking on more sovereign risk just as the banks themselves are being bailed out.

But we actually have very little hard data to look the picture over time and across Europe in a directly-comparable way.

Helpfully, Jean Pisani-Ferry and Silvia Merler at Bruegel, a Brussels-based think tank, have painstakingly put together a dataset of sectorial sovereign bond holdings for eleven EU countries as well as the US. They break down a country’s debt issues into holdings by resident banks, the central bank, other public institutions, other residents and non-residents. The research follows on from their ‘Who’s afraid of sovereign bonds?’ paper in February, which looked the role of eurozone banks in holding domestic government bonds.

The data goes back to the late 1990s in most cases and is broken down — the full dataset and methodology is up on the Bruegel’s website.

Pisani-Ferry and Merler have charted bond holdings by a country’s domestic banks along with holdings by non-residents, showing both the build-up of sovereign debt on the books of local banks and the “flight to safety” by non-residents.

Let’s start with the peripherals:

The cases of Spain, and then Germany and Finland are perhaps the most striking with the lines inverting in the former, and very much diverging in the latter:

The ‘flight to safety’ is easy to see in the core countries as well as in the UK.

A quick note on the UK in case you are wondering why the line dips below zero:

The break-down can be reconstructed for long-term government bonds issued by the UK central government, looking at the UK’s sector financial accounts. To isolate the Bank of England we relied on data on the bank’s holding of sterling securities issued by the public sector, provided by the Bank of England itself. For some years, MFIs’ [Monetary Financial Institutions] holdings of securities are recorded with a negative sign. This is the result of the accounting practice chosen, as holdings of gilts are reported net of long and short positions.

Pisani-Ferry and Merler conclude:

These observations raise a question about the effectiveness of ECB provision of liquidity to banks as a means to alleviate the sovereign crisis. At a point when government bonds are considered risky assets, euro-area banks are faced with both balance sheet and reputational risks compared to their non-euro area counterparts, and may prove reluctant to increase this exposure further.

Related links:Who’s afraid of sovereign bonds? – Bruegel

State-backed bond-buyers? – FT Alphaville

This entry was posted by Masa Serdarevic on Wednesday, August 29th, 2012 at 13:15 and is filed under Capital markets.
Read the article online here: FT Alphaville » Charting sovereign bond holdings across the eurozone