Bond-buying scars will open European can of worms

Nationale Bank Van Belgie NV

16/12/2022 09:04

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pierre Briancon
       LONDON, Dec 16 (Reuters Breakingviews) - The euro zone
will soon have to pay for a decade of European Central Bank
largesse. Rising interest rates are turning the ECB’s portfolio
of bonds acquired since 2014 into a money-losing machine. The
question of how those losses are shared could become a major
source of tension between member states.    
    The amount of reserves created by the ECB by buying
government debt with newly printed money now stands at 3.9
trillion euros. The central bank pays its deposit rate,
currently 2%, on those reserves. That implies a transfer to
Europe’s banks of some 78 billion euros in 2023, or more if
rates keep rising. This outstrips the interest the ECB receives
on its bonds, bought when rates were much lower.  
    Bond-buying losses will be particularly thorny in the euro
zone. Critics of quantitative easing will see the losses as
proof that the tool was risky. The National Bank of Belgium
 BNAB.BR  has warned that it could lose up to 9 billion euros in
the next five years. If other euro area central banks took
similar losses in proportion to their share of the ECB’s
capital, the total could be 304 billion euros over that period.
Central banks of the member states are liable for 80% of these,
with the remaining 20% left up to the ECB itself.    
    There are three ways to share the pain. The first is to use
provisions accumulated by national central banks over the past
decade. These amount to about 300 billion euros, according to
the ECB. But the central banks had wide differences in their
approach to provisioning, meaning some may be left weaker than
others. And they will be loath to exhaust their buffers.   
    The second option would be for governments to step in. A
central bank cannot be declared bankrupt, but operating with
little or negative equity could hurt its credibility. Yet large
taxpayer-funded recapitalisations triggered by the need to pay
banks could create political ructions. Countries with large
banking systems, like France, or high debt, like Italy, may
resist.   
    The third, more palatable option would be to shrink the
amount paid to banks, by cutting interest paid on reserves. The
ECB could pay its deposit facility rate on just some reserves,
and a lower rate on the rest. Some central bankers however fear
this could compromise the transmission of monetary policy. 
    Banks will find themselves in the firing line as rates rise,
even after having suffered a near decade of low returns from the
ECB’s negative rates. And even if central banks don’t penalise
them, they face the added risk that governments may tax them
instead.
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    CONTEXT NEWS
    The European Central Bank decided on Dec. 15 to raise its
key interest rate to 2% from 1.5%, warning that rates “will
still have to rise significantly at a steady pace” in the coming
months, until the central bank is reassured that inflation can
return to its official 2% target.
    The ECB now forecasts inflation to reach 8.4% in 2022,
declining modestly next year to 6.3%, then to 3.4% in 2024 and
2.3% in 2025.
    The ECB also announced that it would start reducing the
portfolio of bonds acquired under its asset purchase programme
by some 15 billion euros a month starting in March 2023.
 (Editing by Neil Unmack and Oliver Taslic)
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