Germany’s central bank may need a bailout to cover losses on the debt it hoovered up as part of the European Central Bank’s (ECB) massive bond-buying programme, the country’s federal auditor has warned.
The Bundesrechnungshof said losses faced by the Bundesbank on more than €650bn (£570bn) of bond purchases were “substantial” and “could necessitate a recapitalisation with budgetary funds”.
The critical report of the ECB’s so-called public sector purchase programme (PSPP) – akin to quantitative easing in the UK and US – throws future bond-buying sprees to prop up the single currency bloc in doubt.
Economists have blamed bond-buying programmes for stoking inflation amid a series of negative supply shocks that have increased the risk of economies overheating.
Steep rate hikes by the ECB meant that the Bundesbank suffered a €1bn hit to its bond holdings last year alone.
This is because the central bank is now paying more in interest to commercial banks on deposits at the Bundesbank than the interest it earns on its stockpile of bonds. The ECB started reducing the size of its balance sheet this spring.
The losses are similar to those seen in the UK, where the Bank of England has estimated that transfers between the Treasury and the Bank will amount to around £30bn annually over the next three years alone.
Unlike in Germany, losses on the Bank’s stockpile of bonds are automatically covered by the taxpayer under a deal struck by former Chancellor Alistair Darling to indemnify the Bank when bond-buying during the financial crisis.
Joachim Nagel, president of Germany’s central bank, warned back in March that the “burdens on the Bundesbank’s profit and loss account are likely to increase considerably in the years to come”.
He noted that the Bundesbank’s €19.2bn war chest of provisions was likely to be wiped out in future years. The Bundesbank also has a separate emergency fund of €2.5bn it can tap into if needed.
Mr Nagel said that while its buffers would be sufficient to cover losses this year, he warned that in subsequent years, “the burdens will probably exceed our financial buffers”.
In a statement to the Financial Times, which first reported the auditor’s warning, the German finance ministry said it had a “different assessment” to the federal auditor of the risks to the budget arising from the Bundesbank’s actions. It insisted that it was “highly unlikely” that losses from the Bundesbank’s monetary policy operations would “put a strain on the federal budget”.
Mr Nagel has also noted that he expects losses to be carried forward on the Bundesbank’s balance sheet, and covered by future profits over “the course of time – as was already done in the 1970s”.
He added: “The Bundesbank’s balance sheet is sound.”
It came as a separate survey suggested Germany risks staying mired in recession this year after a closely-watched barometer of business activity slumped in June.
The closely-watched Ifo business climate index fell to 88.5 in June following May’s reading of 91.5, led by a “substantial” decline in manufacturing. This is the lowest reading since November 2022, coming in the wake of a surge in energy costs, and is well below analysts’ expectations for a fall to 90.7.
All sectors of the German economy suffered a decline, according to the survey, which noted that in manufacturing “the business climate deteriorated substantially”. It added: “Hardly any industry has been left untouched by this development.”
Carsten Brzeski at ING said the collapse in activity suggested that “the rebound of the German economy has ended before it ever really began”.
He added: “Today’s disappointing Ifo index reading suggests that the hoped-for rebound of the German economy is nothing more than hope. Optimism is fading and the economy faces new growth concerns. We are not saying that the economy will be stuck in recession for the next couple of years, but with several short and long-term challenges, growth will remain subdued at best.”
https://www.telegraph.co.uk/business/2023/06/26/german-central-bank-bailout-money-printing-spree/
