The Strategist

How and why Ireland has become one of the US’s largest creditors

09/22/2017 - 11:10

It's no secret that economic giants Japan and China occupy the first two places in the list of the largest creditors of the United States. At that, a small European country has been occupying the third place for nearly a year.

As follows from the report of the Treasury, published on Monday, Ireland owns more than $ 310 billion in the US treasury bonds. This causes bewilderment as it turns out that economic giants with more capacious financial systems, including Germany and Britain, own a smaller volume of treasury securities than the Eurozone's peripheral member.

Ireland doesn’t have such large pension fund as in Japan; neither it has big insurers, which must buy long-term government bonds whose maturity dates correspond to the long-term obligations of companies. Unlike China, the country does not have large exporting companies, whose fast growth would allow Ireland to accumulate a reserve of foreign exchanges. Analysts and investors suspect that the state is one of the largest creditors of the US only on paper, since US technology companies are eager to avoid a 35 percent tax on the repatriation of profits received outside the US, and so invest it in highly liquid treasury bonds where their European headquarters.

"There may be some correlation as American corporations that have subsidiaries in Europe tend to keep the biggest part of their offshore cash in Luxembourg and Ireland," said director of investment research at Capital Advisors Group Lance Pan.

The taxes are low in Ireland, and everyone, including potential employees of companies, speak English. Not surprisingly, many Americans, including Google, Facebook, Apple and Microsoft have chosen the country. Four comppanies, including Amazon, headquartered in Luxembourg, own US government bonds worth nearly $ 200 billion.

Over the past five years, Apple and Microsoft have purchased Treasury bonds for $ 80 billion, doubling the volume of these securities owned by them. Over the same period, the volume of US Treasury bonds on Ireland's balance sheet rose by $ 200 billion. The biggest part of the sovereign debt securities in the country are located on so-called depositary accounts.
The US Treasury does not distinguish these accounts by the type and personality of the real owners and simply ranks them according to the country of placement. That is, it sees no difference between central banks and private managers. Thus, the data can somehow be distorted.

The large volume of US bonds in Belgium, just a little bit inferior to the Irish, can be explained by the fact that the Clearing Chamber of Euroclear, which provides settlements on securities transactions and sometimes owns assets for the benefit of other organizations, is registered in Brussels. Perhaps, China was using this channel to buy state securities. However, the volume of US bonds in Ireland is difficult to explain only by its status as a tax haven.

Although Ireland is a large financial center similar to Belgium, "their activities in financial intermediation do not mirror each other," said senior fellow at the Council on Foreign Relations Brad Setser. The country employs about 2.5 thousand hedge funds, real estate funds and private investment companies; many of them can make large rates in the treasury bond market.

According to analysts, unless the US provide companies with tax holidays, Ireland is likely to retain the title of one of the largest creditors of the US Treasury. At that analysts' opinions diverge when it comes to the impact on the broader market. Some market participants fear that during a turmoil on the market, corporate treasurers of Apple and Microsoft might act as portfolio managers, quickly dropping bonds and thereby exacerbating market decline. However, Setser believes that treasurers of corporations usually behave the same way as central banks, that is, "reserve managers".


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