Less than a year after the UK had to plug an £11 billion (US$13.9 billion) hole to cover projected losses in the Bank of England’s bond-buying program, Germany’s federal audit office has warned that the Bundesbank may need a bailout to cover losses incurred from the European Centeral Bank’s bond-buying scheme, potentially compromising the ECB’s plans to conduct similar operations in the future.
The possible Bundesbank losses are substantial and could necessitate a recapitalisation of the [bank] with budgetary funds,” reads a report by the audit office, the Bundesrechnungshof, which the Financial Times has seen.
Purchasing vast amounts of bonds to lower borrowing costs, known as quantitative easing, has long been controversial in Germany. The Bundesbank argued against it in 2015, when the eurozone’s central bank launched its bond buying, but it was outvoted at the ECB. The audit office’s criticisms are likely to make a repeat of the policy more difficult, especially as some economists blame QE for stoking the recent wave of inflation.
The Bundesbank announced in March that it had suffered a €1bn hit from its bond holdings, as it grappled with the impact of higher interest rates. It also warned that future losses would wipe out its remaining financial buffers, though it denied it would need a government rescue. -FT
The report blames the ECB’s public sector purchase program, launched in 2015, for the turmoil after the bank purchased €2.7tn of sovereign bonds from eurozone countries. The Bundesbank also bought a devilish €666bn of German government debt under the program, which was buying bonds up until last year.
The magnitude of the purchases in conjunction with the ECB’s sub-zero interest rates caused the price of bonds to float higher, which resulted in several yielding negative rates. As such, the Bundesbank is now under pressure due to the growing gap between it’s bond income and the interest it pays to commercial banks on their deposit.
In March, the Bundesbank said that future losses would “probably” exceed its remaining €19.2bn of provisions and €2.5bn of capital, but that it’s also got €170bn of gold and foreign exchange reserves, and could carry forward losses against future profits, as the Financial Times writes, nothing that the bank instituted similar measures in the 1970s.
According to a spokesperson for the German central bank, its balance sheet is “sound even in the event of a loss carry-forward” due to its “considerable amount of net equity.”
That said, FT notes that Germany’s public finances will still be affected, as the bank has ceased dividend payments to the government, depriving Berlin of a massive income stream that has amounted to €22bn over the past decade. According to the bank, dividends will remain paused for “an extended period of time.”
The German finance ministry has hit back against the audit’s findings, claiming in a “different assessment” that it’s “highly unlikely” that losses from Bundesbank’s monetary policy operations would “put a strain on the federal budget.”
In 2020, Germany’s constitutional court shocked European capitals by ruling that the German authorities and the EU’s top judges had failed to properly scrutinise the PSPP, in a move that threw the policy into doubt.
The spat was resolved when the ECB produced a “proportionality assessment” backed by the German government and the Bundesbank to justify its bond buying, as the judges in Karlsruhe had requested.
The report by the Bundesrechnungshof, Germany’s highest government audit authority, looked into whether the German government — and particularly the finance ministry — was fulfilling the obligations imposed on it by the constitutional court’s May 2020 ruling, including “continually monitoring” the actions of the ECB. -FT
The audit office, meanwhile, pointed to the risks they say the operations posed to Germany’s public finances – and accused the finance ministry of failing to adequately consider what effect Bundesbank losses may have on the country’s budget.
“If the functioning of the Bundesbank is endangered by an inadequate or even negative net equity, the Federal Republic of Germany can be obliged to inject capital,” reads the report, which calls on the finance ministry to employ “scenario analysis” to “regularly assess risks to the federal budget arising from the Bundesbank’s activities and inform the German Bundestag about them, in an appropriate manner.”
“Depending on the extent and probability, the risks arising from monetary policy could, in the worst case, endanger the budgetary autonomy of the German Bundestag,” reads the audit report.