Europe’s money printing spree could trigger bailouts on the Continent, as governments are forced to pay for a decade of cheap currency.
BNP Paribas has warned that the European Central Bank’s (ECB) continued shrinkage of its balance sheet poses a growing threat to the biggest economies in the EU, which “may need to be recapitalised”.
The International Monetary Fund warned recently that central banks across the EU would suffer “large” losses, amounting to around €55bn in the next two-year period. Germany’s Bundesbank is “likely” to experience the most severe and persistent losses.
A staff paper from the IMF stated that these losses would wipe out all of the German central banks reserves, a process which would take over a decade to complete.
Both the German and Dutch authorities have acknowledged that bailouts could be needed as losses increase, even though both are able, unlike the Bank of England, to carry losses forward on their balance sheet.
During the eurozone crisis, the ECB purchased €5 trillion in bonds to help support the economy and lower borrowing costs. The quantitative easing program was funded by creating new money in order to purchase the bonds.
After a rapid increase in interest rates, however, the enormous portfolio of debt that is on central bank balance sheets has now become a loss-making asset.
The central bank is paying commercial banks more interest on reserves than they are earning on their bonds. The central banks are forced to use reserves to cover the difference.
Paul Hollingsworth is the chief European economist of BNP Paribas. He said: “These core countries are experiencing quite substantial losses… but it’s about how long they will continue to suffer and how much damage can be expected over time.
It’s not the main case, but it is possible that at some point the national central banks will have to be recapitalised. This raises obvious fiscal issues.
According to Mr Hollingsworth, governments could be forced to reduce spending or increase taxes if the central banks need bailouts.
More than a quarter of the outstanding debt of both the ECB (European Central Bank) and Bank of England (Bank of England) is still held by these two central banks.
IMF stated that if the entire ECB QE stockpile was sold all at once, it would cause losses to the Eurosystem of €1 trillion at current market price levels. This would “disappear all buffers” set up to absorb losses.
The IMF said that the figures reflected a purely accounting exercise and not the reality of Europe.