Keeping track of the LSAP losses

This is mostly a follow-up to my post last Saturday on the LSAP losses.

In that post I noted that while the LSAP was still running, the monthly line item on the Reserve Bank balance sheet recording the Bank’s mark-to-market claim on The Treasury under the indemnity was a reasonable proxy, on prevailing market prices, of the direct fiscal losses the LSAP programme would result in. And it was an official number.

The Reserve Bank published its monthly balance sheet for the end of March. The Bank’s claim under the indemnity as at 31 March stood at $7821 million.

However, as I also noted in Saturday’s post, this number is no longer even an approximate estimate of the direct fiscal losses from the LSAP programme. It is still a best guess, on market prices, of the unrealised losses on the bonds the Bank is still holding.

But the Bank’s holding of bonds are now much lower than they were at peak. In the programme as a whole, the Bank purchased government bonds with a face value of $53480 million and LGFA bonds with a face value of $1735 million. All of those purchases were covered by the indemnity.

However, since July last year the Bank has been selling back to The Treasury each month government bonds with a face value of $415 million. Total sales to date – most recently a parcel on Monday – total $4150 million. The resales programme is starting with the longest-dated (most risky) bonds, on which the largest percentage losses will typically have been made. As those bonds are sold back to The Treasury the Reserve Bank’s losses are realised, and their claim on the indemnity is met each month by The Treasury. (In addition, as the table below records, there were some payments from the RB to Treasury in the period before resales began, which may represent higher coupon payments to the Reserve Bank exceeding the Reserve Bank’s (OCR) funding costs during the very low OCR period.)

There appears to be no easy place to find the monthly indemnity payments (I have suggested to Treasury that in the interests of transparency it would be good if they or the Bank provided such a table), but there were some hard numbers, and some indications, in a November 2022 Treasury paper that I drew from in Saturday’s post

Actual market rates have changed since then, but the total payouts to date could be almost $2 billion.

In addition to the sales back to The Treasury, some of the bonds the Reserve Bank purchased have matured in their hands.

On the LGFA side, $216m (face value) matured in May 2021, $250m in April 2022, and another $250m this month.

In respect of government bonds, $1300m matured in May 2021 (and on those bonds the Crown appears to have roughly broken even from having done the LSAP purchases – the OCR, the Bank’s funding cost, having been 0.25 per cent throughout the period the May 2021 bonds were held), and another $7471 million (face value) matured a few days ago, 15 April 2023.

As a reminder, here is what the Reserve Bank is indemnified for

Whatever claim the Reserve Bank had in respect of the April 2023 bonds will presumably drop out of the reported indemnity claim balance sheet item in the next balance sheet and will have been met by Treasury in their monthly payment.

Total LSAP bond purchases were $55215 million (face value). Maturities and resales mean that the face value has been reduced by (face value) $9487 million [correction $13637m – the original number was just maturities]. The monthly reported indemnity claim item on the Reserve Bank’s balance sheet captures only the market-implied loss on the bonds still held. But the total direct fiscal losses on the programme – not reported very transparently – include the substantial realised losses already settled by The Treasury. Each month – while market bond rates remain high – the realised losses will mount and the indemnity claim item (while fluctuating from month to month) will be trending down. When the last bonds mature or are sold (several years away yet on current plans), the Reserve Bank balance sheet indemnity item will drop away to zero. But large losses will have been met by the taxpayer – on what we know at present, probably something like $10bn of them.