Jens Weidmann, the Bundesbank’s president, claimed today that the decision by the central bank to more than double the provisions for losses on assets held on its balance sheet on the back of “risks stemming from monetary policy operations” was not politically motivated.
Here at Money Supply, we beg to differ.
In fact, the three figures below, taken from the Bundesbank’s 2011 balance sheet, out today, highlight rather nicely just why the relationship between Buba and the European Central Bank is becoming more fraught.
Mario Draghi on Thursday faces perhaps his biggest political challenge since he become European Central Bank president in November.
Last week, a leaked letter from Jens Weidmann, Bundesbank president, highlighted rising anxiety at Germany’s central bank over the risks entailed in the ECB’s extraordinary actions to support the eurozone banking system, which have seen it inject more than €1trn in three-year liquidity in recent months.
How Mr Draghi responds to the confrontation at his press conference after Thursday’s governing council meeting could determine the extent to which his stewardship of the eurozone crisis is undermined by Bundesbank resistance.
The dispute could well dominate Thursday’s proceedings: with the ECB still waiting to see the impact of its liquidity measures on the real economy, no change is expected in interest rates. The suspense over Greece’s bail-out is unlikely to have cleared.
Mr Weidmann’s letter created considerable irritation and bewilderment among other members of the ECB’s 23-strong governing council.
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.
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Both the European Central Bank and the Bank of England set monetary policy on Thursday.
Neither the governing council nor the monetary policy committee are expected to budge. But we do have Mario Draghi’s monthly press conference to look forward to.
Expect a few awkward questions on Jens Weidmann’s leaked letter as well as reaction to this week’s offer of three-year loans.
The presser takes place at 14.30 local time (13.30 in the UK) on Thursday. The Bank’s decision is released at noon local time, with the results of the governing council vote out at 12.45 in London (13.45 in Frankfurt).
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.
The governor of the Bank of England has often been critical of eurozone leaders, frequently condemning their failure to accept that the region’s sovereign debt crisis is one of solvency, not liquidity.
But, at the Bank’s Inflation Report presser on Wednesday, Sir Mervyn was a little more supportive of the region’s central bank.
Forget calling for the ECB to become lender of last resort for the more troubled of the eurozone’s governments, he said. It was simply not the responsibility of it, or any other central bank, to take on such a role.
Not just financial markets look set to be disappointed by the European Union weekend summitry, which has just started in Brussels. A big loser could be the European Central Bank.
The ECB was forced to reactivate its government bond buying programme in August after the eurozone leaders’ last attempt at crisis management – at a summit in July – backfired and the crisis spread to Italy and Spain. Then, the expectation was that the European Financial Stability Facility would become operational and able to takeover the ECB’s role in intervening in bond markets. Without an effective deal soon to enhance the EFSF, such hopes will be dashed.
Is Jens Weidmann, Germany’s Bundesbank president, rallying opponents of the European Central Bank’s government bond purchasing scheme? The Frankfurter Allgemeine Zeitung reports he hosted a secret meeting on Tuesday in the wine region that surrounds Frankfurt. Those apparently invited included Yves Mersch and Klaas Knot, his counterparts from Luxembourg and the Netherlands who are similarly conservative-minded.
Germany is awash with conspiracy theories these days about the ECB, and the idea that Mr Weidmann would want stiffen the sinews of other opponents of its bond buying – which has exceeded €70bn in the past six weeks - might appear plausible. I have heard an alternative version of the story, however.
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Both of next week’s key events are on Monday.