The feel good factor surrounding Quantitative Easing (QE) has been dampened this week as the political situation in Greece grabbed center stage. However, assuming that the Euro will still be in existence till the end of 2016, QE offers a once in a lifetime opportunity for the Maltese economy. The way Government Stocks are traded in Malta and our insular mentality offers a unique environment for monetary policy to act. What follows are my expectations.


As the Central Bank of Malta’s (CBM) capital in the ECB represents ‘circa’ 0.6%, the CBM’s share of the pie would be over €30 million a month for the next 2 years. This is a staggering amount of cash going into the Maltese economy on a monthly basis. Effective implementation by the CBM will be key to the success of the program; to everyone getting a share of the pie.


The CBM is expected to use its market making role in the secondary market to purchase the €30 million worth of Malta Government Stock monthly starting in March. Traditionally the Central Bank has often bid at a price below what would be perceived as the equilibrium price.

Low trading volumes have often been attributed to unwillingness by retail holders of MGS to part from the assets. However, in economic terms everything has a price and unwillingness to trade is only a symptom of a price below equilibrium.

Following the QE announcement, trading volume in Malta Government Bonds has increased significantly as trading prices increased. In order to manage to purchase €30 million MGSs on a monthly basis this trend has to be maintained.

The Consequence

As the Central Bank tries to attract sellers by increasing the price, holders of MGSs may be able to cash their holdings at a very good price. These happy investors will end up with cash holdings that will include their initial investment plus a sizeable profit. They will then have to decide what to do with this cash pile, which should in theory amount to €30 million monthly.

Financial Institutions

Local Financial Institutions and Investment Funds also are assumed to hold large amounts of MGS’s and this may be an opportunity to take some profits on these holdings. Having said this, a central bank wanting to maximize the effect of QE would prefer to trade with the retail investor. The notion that banks would use the extra cash to increase the supply of loans may not be realistic. Financial institutions would probably reinvest in international financial markets thus shifting the benefits to another country.


Some will choose to part with some of their gains because why would anyone invest in the first place if one cannot enjoy it? An increase in consumer spending is thus expected to be one of the first effects. Another significant part will be reinvested in financial assets causing asset inflation; so expect the local equity and corporate bond markets to react.


Part of the funds will be redirected into the property market. This may eventually lead to significant growth in the construction sector. The property market may be a big winner in the end.

The Central Bank of Malta

The CBM will hold the MGSs as assets thus collecting the interest payment from the government. As central banks are public entities, profits are normally returned to the government. More or less, the government is practically writing-off its interest on the bonds purchased by the Central Bank.

If implemented correctly, quantitative easing in Malta has the potential to provide a significant boost to the Maltese economy as the cash injection ripples around the economy. It is possible that €30 million would pass into consumer pockets, into the property market and into the economy on a monthly basis for the next 2 years. In all probability Malta, due to the way the local bond market is structured, is an ideal test case for QE.