ECB demands €17bn after Greece move
Greece’s debt rescheduling has already bitten for some eurozone banks.
The ECB last week demanded €17bn in “margin calls” — the largest amount ever — from banks tapping it for liquidity.
The ECB gave no details but the surge followed its decision to suspend the eligibility of Greek bonds as collateral for the central bank’s loans.
ECB balance sheet tops €3 trillion
Another milestone has been reached in European Central Bank history.
Following last week’s three-year longer-term refinancing operation, the size of the ECB’s balance sheet has exceeded €3trn for the first time (ECB, in this context, actually means “eurosystem” — the network of eurozone central banks of which the ECB is part). Its latest financial statement shows a €330.6bn increase in assets compared with last week, which was more or less the same as the increase in lending to eurozone banks.
As such, the ECB has drawn further ahead of the Federal Reserve in terms of the overall size of its balance sheet (see chart below).
The (well) reserved Bundesbank
What do central bankers do when they are worried? They increase their reserves.
Tuesday’s Bild Zeitung reports the Bundesbank will next Tuesday declare a sharp drop in profits after increasing provisions against risks on its balance sheet. The amount transferred to the German finance ministry would fall below €1bn, Bild said. That would be less than half the €2.2bn profit reported for 2010 – which was around half the previous year’s figures, again because of higher provisions.
The Bundesbank is not confirming Bild’s report, but it sounds plausible. Jens Weidmann, Bundesbank president, told Handelsblatt in an interview last month that the rising risks borne by Germany’s central bank would require “more rather than less provisions. That will have an equivalent impact on the level of Bundesbank profit.” Besides significantly higher provisions this year would fit with the Bundesbank president’s increasingly-cautious rhetoric more recently.
Cœuré, the ECB and zero interest rates
How far would the European Central Bank under Mario Draghi go in cutting interest rates?
The ECB president has taken care to rule out little in the way of possible steps were the eurozone crisis to deteriorate again. But Benoît Cœuré, the ECB’s new French executive board member, has hinted at one limit. In a speech delivered in the US a few days ago but just published on the ECB’s website, he warns of the potential costs of reducing interest rates to zero, or even pushing them into negative territory.
Draghi on collateral, bond purchases
The Frankfurter Allgemeine Zeitung interview with Mario Draghi produced other insights (see earlier post on his comments on the ECB’s Greek bonds).
Positive news about the eurozone outlook had increased since the ECB’s last governing council meeting, he said, “although uncertainty remains high”, which appeared to confirm there are no further cuts in official interest rates in the pipeline.
Mr Draghi also hinted strongly he would not relax further standards applied to the collateral banks can use to obtain the central bank’s liquidity.
Draghi defends Greek bond swap
At last! The European Central Bank has said something official about its Greek governments bonds.
As previously noted, the ECB’s communication on the subject has been opaque. The bank has still not publicly announced the swap deal it negotiated that will allow it to escape forced losses. But Mario Draghi, president, could not avoid commenting when quizzed on the subject by the Frankfurter Allgemeine Zeitung in a interview published on Friday.
Cyprus’s central bank and its Greek bonds
European Central Bank communication was not at its most brilliant ahead of this week’s deal on a second bail-out for Greece. Nothing has been said formally about the bond swaps, which will circumvent forced losses on Greek government bonds acquired as part of its eurozone crisis-fighting measures or by individual eurozone central banks for their investment portfolios. We still do not know, officially, the size of those holdings.
The result has been a lot of misinformation. One commonly held assumption is that some of the eurozone’s monetary institutions had worrying levels of exposure – for instance Cyprus’s central bank. In fact, the amount of Greek bonds it holds are much lower, I have been told by someone who has seen its figures.
More ECB agonies over those Greek bonds
The deal is all but done but we still have no formal announcement that the ECB has exchanged its Greek bonds for new bonds that will be exempt from legal steps by Athens to force losses, as reported already.
The hold-up is, perhaps, over the issue of what to do about those Greek bonds held by eurozone national central banks in investment portfolios but not acquired under the ECB’s bond buying programme launched by Jean-Claude Trichet, then president, in May 2010. We don’t have any figures on how big these holdings are, or where exactly they are — although the biggest are thought to be held by the central banks of France, Cyprus and, of course, Greece. The Bundesbank has none.
Weidmann and the ECB’s Greek bonds
Jens Weidmann, Bundesbank president, would have “no problem” with the European Central Bank selling its Greek bonds as part of a package to help the country’s bail-out. But he has thrown doubt on whether governments will pick-up the bill.
“I would have no problem removing the balance sheet risks that we were hesitant about accepting in the first place – so long as their removal does not lead to losses,” he told Handlesblatt, the German business newspaper, in an interview published on Wednesday.
His comments provide confirmation that the ECB would be prepared to forgo the profits it had expected to make on its Greek bond holdings – but, crucially, that no deal has yet been struck.
How the ECB saved the eurozone (last time)
Just how big a difference did European Central Bank action make after the collapse of Lehman Brothers in 2008?
ECB researchers have come up with some new, flattering numbers on the economic impact of the ECB’s decision to offer unlimited liquidity to eurozone banks. That step – taken under Jean-Claude Trichet, then ECB president – foreshadowed the decision in December by Mario Draghi, his successor, to extend the maximum loan term from one to three years.
The authors’ key conclusion, in a discussion paper from the London-based Centre for Economic Policy Research, is that eurozone industrial production two years after Lehman Brothers was 2 per cent higher than would otherwise have been the case and unemployment about 0.6 per cent lower.
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Ralph Atkins, Frankfurt bureau chief, has been writing about European economics and politics for the Financial Times for more than 20 years following an economics degree from Cambridge. He has been watching the European Central Bank and eurozone economies since 2004. He has previously worked in London, Bonn, Berlin, Jerusalem and Brussels. RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
James Politi is US economics and trade correspondent for the Financial Times, based in Washington DC. He joined the Washington bureau in January 2008 following four and a half years as US deals correspondent covering M&A and private equity. James Politi joined the FT in London in 2000 with an MSc at the London School of Economics, and undergraduate degrees from Georgetown University and the University of Florence. RSS
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