By Simon Miller
The European Central Bank (ECB) would only have to see its assets fall by around 4% for its capital base to be wiped out, think tank Open Europe has warned.
The think tank estimated that overall the ECB is now leveraged around 23 to 24 times, with only €82bn (£73.1bn) in capital and reserves. As a result, should the ECB see its assets fall by just 4.25% in value, from looking losses on its loans or purchases of government debt, its entire capital base could be wiped out.
In its report, A House built on sand, Open Europe estimated that the ECB has exposure to struggling Eurozone economies of around €444bn – an amount roughly equivalent to the GDP of Finland and Austria combined. Of this, around €190bn is exposure to the Greek state and Greek banks.
Open Europe’s Director Mats Persson commented: “The ECB’s attempts to paper over the cracks in the Eurozone may have temporarily softened the impact of the crisis, but have exacerbated the situation in the long-term. The ECB has dug itself into a hole and now we are seeing that there is no easy way out.”
The report warned that hefty losses for the ECB were no longer a remote risk, with Greece likely to default within the next few years – even if it gets a fresh bail-out package from the EU and IMF – which would also bring down the country’s banks.
“Should Greece restructure half of its debt – which is needed to bring down the country’s debt to sustainable levels – the ECB is set to face losses of between €44.5bn and €65.8bn on the government bonds it has purchased and the collateral it is holding from Greek banks. This is equal to between 2.35% and 3.47% of assets, meaning it comes close to wiping out the capital base,” said the report.
“Huge risks have been transferred from struggling governments and banks onto the ECB’s books, with taxpayers as the ultimate guarantor. There’s a real risk that these assets will face radical write-downs in future with Eurozone governments and banks teetering on the edge of bankruptcy. This amounts to a hidden – and potentially huge – bill to taxpayers to save the euro,” said Persson.
He concluded: “The ECB’s wobbly finances and operations to finance states have landed a serious blow to its credibility. It must now seek to become the strong, independent bank that electorates were promised when the single currency was forged.”
At the International Monetary Fund's (IMF) mission to the UK yesterday, its acting head John Lipsky told reporters that he the Greek debt package agreed last Friday (3.6.2011) did not envisage a debt restructuring.