The ECB’s exposure to peripheral sovereign debt and a host of other assets of dubious quality has sparked concerns about the central bank’s solvency.
The concerns are misplaced. Central banks cannot go bust. The vast majority of the ECB’s obligations are denominated in euros and so, in the case of losses, the central bank can simply print more money.
But money printing on a grand scale could spark inflation. And, while the ECB and the eurosystem central banks have a capital buffer of €80bn, this is relatively small when the size of the eurosystem’s balance sheet, which stands at a whopping €2.7trn even before tomorrow’s offer of three-year loans, is taken into account. Read more