Business World

Friday 23 March 2018

ECB facing own cash crisis as bond buying cuts reserves

Donal O'Donovan

THE ECB could be facing a cash crisis of its own after becoming the main tool in Europe's battle to contain the debt crisis.

The news comes after reports that the ECB bought €2.67bn of mostly Irish and Portuguese government bonds last week -- the highest spend by the bank since June.

Last night, the ECB confirmed the purchased amount last week under its securities market programme. It was up from €1.9bn the week before.

It is the first confirmation that ECB president Jean Claude Trichet's efforts to calm the bond markets two weeks ago with a series of tough speeches was backed by a real increase in buying.

It takes the total amount of government bonds bought by the ECB from private investors since May to €72bn.

The bank has also provided €136bn of emergency loans to banks in recent years by buying their bonds under repurchase agreements.

Meanwhile, Reuters said last night the ECB was considering requesting fresh cash from eurozone member states to help it cope with the crisis.


The ECB is understood to be concerned about possible losses it could suffer as a result of its bond buying programmes.

The ECB has acquired a range of bonds over the past two years. That includes the government bonds purchased in the secondary market and a range of mostly asset-backed bonds it has accepted from European banks in exchange for providing them with cheap loans.

About a quarter of the loans to banks made by the ECB were to institutions in Ireland.

A source told Reuters the ECB was planning to ask for its capital to be raised. A second source at the ECB confirmed the plan was being discussed.

"The ECB is worried about potential losses from its bond buying," the source said.

"At the moment we are buying modest amounts, but what if that is increased, and what if the bonds you buy are suddenly worth 30pc less?"

The ECB declined to comment.

The bank's subscribed capital is almost €5.8bn, but it has a balance sheet of almost €138bn, according to its latest annual report.

All of the EU's 27 national central banks contribute to the ECB's capital. The 16 countries already using the euro make up 70pc of the money with other EU members -- including Britain and Denmark who have euro opt-out clauses -- making up the rest.

National central banks can increase their capital in a number of ways, including government injections, selling off assets, using reserves or by maintaining profits.

A decision to bolster the ECB's capital would come at a time when central banks and governments are struggling with the cost of the financial crisis and recent turmoil on the currency bloc's financial and debt markets.

France's central bank, Banque de France, last week revealed plans to double its capital. If the move was replicated for the ECB, Germany as the biggest contributor would have to stump up €1bn.

Irish Independent

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