Aurelia Butler

The European Central Bank made no profits for the first time in 15 years in 2022 after suffering writedowns on its bond investments, with analysts predicting years of losses following the reversal of its ultra-loose monetary policies.The ECB said on Thursday it would have made an annual loss of more than €1.6bn if it had not drawn on the provisions it has built up in recent years to cover financial risks, adding it would scrap the dividend it usually pays to eurozone national monetary authorities. Those dividends — amounting to €5.8bn since 2018 — are usually passed on by the national central banks to eurozone governments. Several national central banks, including those in the Netherlands and Belgium, have warned their governments that they expect to make significant losses. As rates rise, the interest central banks pay on commercial lenders’ reserves is likely to be far greater than the interest earned on bonds bought under the ECB’s crisis-fighting programmes. Losses at the ECB and other central banks are likely to reignite the debate about aggressive monetary easing. Since the global financial crisis, rate-setters around the world have bought vast amounts of bonds at ultra-high costs to counter low inflation and financial risks, but are now starting to shrink their balance sheets. The ECB began its quantitative easing programme in 2015. Daniel Gros, a fellow at the Centre for European Policy Studies think-tank, estimated that eurozone central banks including the ECB could suffer about €600bn of losses on their investments in government bonds, if interest rates rise to 3 per cent and stay there for six years. The bank’s benchmark deposit rate has risen from minus 0.5 per cent last July to 2.5 per cent. Rate-setters have hinted it will hit 3 per cent in March. “The ECB’s bet that interest rates would stay low is now backfiring,” said Gros. Critics are likely to seize on the losses to support legal challenges against the ECB’s bond-buying programme, with one case still pending in the German constitutional court.Most analysts think these shortfalls should not matter as central banks do not aim to make profits and cannot go bust when they have the power to print money, earning revenue on the production of currency through a process called seigniorage.“ECB losses should have next to no impact on the conduct of monetary policy unless it becomes a political issue,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, adding that some parliaments could call for central banks to be recapitalised. Ducrozet estimated the ECB would suffer €90bn of “flow losses” on the mismatch between the higher interest it pays to national central banks and the interest it earns on bonds in 2023 and again in 2024. But this would be lower if it cuts rates next year.The ECB is yet to take any writedowns on the value of the €4.9tn of bonds it and national central banks bought under its QE programme, despite the value of government debt falling sharply last year. The Frankfurt-based institution has built up large buffers it can use to absorb future losses, including its €6.6bn provisions, €8.9bn of capital and €36bn of revaluation accounts stemming from unrealised gains on investments.The last time the ECB made zero profits and distributed no dividends to the national central banks that are its shareholders was in 2007. Its last annual loss was in 2004 when it was hit by foreign exchange losses due to the rapid appreciation of the euro. More

Turkey has cut borrowing costs as the central bank sought to support the economy following this month’s devastating earthquake, the latest in a series of big interest rate reductions ahead of this year’s election. The central bank on Thursday cut its main interest rate by 0.5 percentage points to 8.5 per cent, matching expectations of economists polled by Refinitiv. The benchmark one-week repo rate has been cut from 19 per cent in March 2021 to 9 per cent by the end of last year under pressure from Turkish president Recep Tayyip Erdoğan. Policymakers said the latest interest rates cut was made in part to dull the effects of the February 6 earthquake, which toppled thousands of buildings, killed more than 47,000 people and upended the lives of millions more. “It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake,” the central bank said. The central bank also cited international recession risks and indications that cost pressures across the Turkish economy are easing as part of its rationale for its decision. Erdoğan, who exerts a heavy influence on central bank decision-making, has taken a series of measures in a bid to bolster the economy and the finances of those affected by the disaster. The government on Wednesday banned businesses from dismissing workers for three months in the 10 affected provinces, while also laying out plans to provide affected businesses with help paying employees’ wages. Erdoğan’s government has been criticised for its initial reaction to the earthquake and over a building amnesty programme that analysts say worsened the scale of the disaster. The quake struck as the Turkish president was waging the toughest election campaign of his two decades in power. He had previously signalled that elections would be held on May 14, but some analysts expect him to push it back. Economists are worried that fresh cuts to borrowing costs could inflame Turkey’s already severe problem with soaring prices. Inflation registered at just under 58 per cent in January, down from a high of 85.5 per cent in October — but still a highly elevated reading.Enver Erkan, an independent economist, said inflation had been falling because of very high prices in the previous year’s period, which is known as the “base effect”, and that the falls could give the central bank the “confidence” for further pre-election rate cuts. “Monetary and fiscal policy will remain broad until the election,” he said. The central bank has put in place a broad set of other measures that affect the borrowing costs and deposit rates for individuals and businesses, which many economists say has reduced the overall effect of changes in interest rates. The lira was little changed after the interest rate decision, trading near an all-time low of TL18.87 against the US dollar. It has fallen 27 per cent over the past 12 months as a result of the high inflation and low interest rates. Moves by the government to push businesses and individuals to hold more lira, along with interventions by the central bank have helped keep the currency from sliding further. More

BEIJING (Reuters) – China’s top graft-busting body on Thursday vowed to “resolutely” crack down on corruption in the financial sector, days after a well-known Chinese dealmaker became the latest business executive to go missing without explanation.In a strongly worded commentary on its website, the Central Commission for Discipline Inspection (CCDI) vowed to “seriously punish … corrupt elements” in “resource-rich, capital-intensive areas” including finance, state-owned enterprises and grain purchasing entities.”We must resolutely investigate and deal with corruption where political and economic issues are intertwined, resolutely prevent leading cadres from becoming spokesmen and agents for interest groups and powerful groups, and resolutely prevent political-business collusion,” it said.The wording suggests that President Xi Jinping’s signature anti-corruption campaign is increasingly turning towards the corporate sector.CCDI corruption probes in recent years felled government and Communist Party officials, including in the police and the judiciary.The abrupt disappearance last week of Bao Fan, founder of investment bank China Renaissance, sent chills through the business sector and was the latest in a series of cases of high-profile Chinese executives to suddenly vanish from public view.The CCDI, which roots out and punishes corruption within the 97 million-member ruling Communist Party, is extremely powerful and operates above state oversight. Fighting corruption to advance the party’s “self-revolution” has been a signature tool of Xi’s rule since he became China’s supreme leader in 2012.Xi’s corruption fight has proven popular among a public that had grown fed up with widespread graft, and has also helped him consolidate power by replacing rivals with his own loyalists, analysts have said.Thursday’s statement comes more than a year after the CCDI launched a high-profile investigation of the state banking and insurance regulator in October 2021, as part of a broader campaign to weed out corrupt Communist Party officials in the financial sector. More

While the 1.6 billion euro ($1.7 billion) loss was entirely covered by provisions, it raises questions about whether the ECB might one day run out of such buffers and who will foot the bill of its past largesse now that inflation is back and rates high.Most of the loss revealed on Thursday came from writedowns in the ECB’s relatively small own-funds and U.S. dollar portfolio, and from the interest it paid to central banks of euro zone member countries. But the ECB has yet address the valuation of hundreds of billions of euros worth of bonds bought under its stimulus programme, a much bigger issue, especially for the national central banks which actually made most of the purchases. Values have probably plunged since the ECB started raising borrowing costs and curbing asset purchases last year to fight a sudden surge in inflation.Policymakers decided against writing down the value of those bonds on the ECB’s balance sheet, where they are accounted for “at amortised cost subject to impairment” – a formula that gives them scope to ignore some market fluctuations.The ECB valued bonds held on its balance sheet and bought under its stimulus programmes at 457.3 billion euros as of the end of December – equivalent to just under 10% of all the bonds held by the Eurosystem of central banks under such schemes. The central bank for the euro zone, which now has 20 member countries, has still 6.6 billion euros worth of provisions, 8.9 billion euros of capital and 36.1 billion euros in a “revaluation account” designed to cover market losses. If these buffers were to become depleted, it could ask its shareholders – the 20 national central banks of the euro zone – for a capital increase or, more likely, carry the losses forward into future years. That would represent a challenge to the ECB’s own longstanding doctrine that a central bank with low equity “may be regarded as not being financially independent and, as a result, its policy actions may be deemed not to be credible”.Some of the euro zone’s largest national central banks will also present their annual reports in the coming weeks.($1 = 0.9435 euros) More