Emphatic ‘no’ from Malta to EU plan on government bonds

Malta is “completely against” a proposal by the EU to reduce risk from banks buying government bonds, a move that could have significant implications for European lenders, particularly Malta and its southern European neighbours.

Under international rules, banks don’t need to hold any capital to compensate for any possible losses on sovereign debt holdings because of the historically low chances of a government default.

And unlike other types of assets, lenders like governments face no limits on their holdings of this debt. This has encouraged banks, particularly in Italy, Spain and Portugal, to buy a lot of government bonds.

“Malta is completely against this idea of sovereign debt exposure, for the simple reason that Europe is seemingly aiming at creating problems where there have not even been during the worst of the financial crisis, and there aren’t today,” finance minister Edward Scicluna told the press on Friday in Amsterdam, where EU finance ministers met.

“Just because academically you could create a new risk, just like you could create potential risks everywhere… like for example, what about if tourism were to fall by 10%, then you start to try to forecast this and that… it would get you nowhere,” Scicluna said.

Resident banks in Malta hold 43% of all sovereign debt, according to the Central Bank of Malta. Over the past five years, banks’ total assets invested in government stocks have decreased from 11.1% in 2011 to 8.8% in 2015 according to The Times Business.

The minister said it was to Malta’s advantage especially during the financial crisis, that government debt was taken up by local institutions and citizens. “There was no speculation at all, and we had no outside exposure, unlike Italy and others, where just speculation was undermining the sustainability of the debt for that particular country…

“Malta was in a beneficial situation where it didn’t have that problem. So now are we saying that we are going to turn it into a problem? We need to be convinced why.”

Scicluna said the European Commission has asked the International Monetary Fund for advice on the matter.

“When somebody on a technical or an academic level starts creating such a risk… I look back and see how during these past eight years, even during the worst of the crisis, such a risk did not come about,” Scicluna said.

According to a 2014 analysis from Fitch Ratings, major eurozone banks would have to shed around €1.1 trillion of government bonds if they were required to reduce their holdings to 25% of capital. If exposure were capped at 50% of capital, the selloff could reach €800 billion.

North-South divide

As usual, EU officials are going to be split across regional levels, with governments who depended on sovereign debt to retain liquidity and service debt, opposing the ideas.

Germany and other fiscally hawkish states say governments should reduce their holdings of sovereign debt to sever the toxic link between banks and their governments and to prevent future bailouts.

They say they want new rules to reduce the risk on banks’ balance sheets, and minimize the chances of taxpayer-funded bailouts.

But countries like Malta, and Italy, warn that changing the way government bond holdings are treated could hurt both lenders and governments.

Italy’s Prime Minister, Matteo Renzi, has already told senators that his government “will veto any attempt to place a cap on sovereign bonds’ holdings in banks’ portfolios.”