#ECB #goal #billion #hole #Lagarde #presidency #crosshairs
Boomerang? Own goal? In the end, what matters is that the account of the repeated monetary tightening has also been presented to the ECB. And it is a high bill that will stain an almost immaculate accounting record, due to that loss of almost 1.3 billion (1,266 to be precise) recorded in the 2023 budget. In the history of the Eurotower, the “red” had appeared once only once, twenty years ago, at the time of Jean-Claude Trichet’s presidency. At the time, the blame was placed on the strong euro; now the culprit is easily identifiable in the 450 point increase in rates which since July ’22 have determined a clear change in Frankfurt’s monetary policy.
Nothing unexpected, however, given that last year the accounts broke even only thanks to the use of provisions. A makeover work that this time was not possible to replicate despite the bank led by Christine Lagarde having entirely used up its reserves, equal to 6.6 billion. Interest expenditure, 7.193 billion, is too high to be able to completely fill the hole and to be able to provide dividends to the central banks of the Eurosystem. Almost a twist of fate at a time when individual credit institutions, swollen with profits thanks to the crackdown on the cost of money, are preparing to remunerate shareholders handsomely.
Moreover, the choices made have a cost because they then reverberate from an accounting perspective, as already demonstrated by the Bundesbank and the Swiss National Bank. And if now the ECB is somehow licking its wounds for the blows it inflicted on itself, it is worth explaining the reason for these losses. To do this, it is necessary to go back to the over seven billion in interest expenditure, what are technically called Target 2 liabilities and are generated when Frankfurt purchases securities from the other central banks in the Eurozone.
Following the monetary tightening, these interest expenses rose to 3.8% on average (from 0.6% in 2022) as they are linked to the so-called Mro, or the rate on main refinancing operations; at the same time, the yield on the securities held by the ECB increased, but not enough (to 3.4 billion, from 1.5 billion the year before) to evenly balance the accounts. Naturally, nothing changes at the top levels of the ECB, where a statement reassures them that the losses suffered have “no impact” on the “ability (of the bank, ed.) to conduct an effective monetary policy”. Nor, at the moment, do the conditions appear to exist that would make a capital increase inevitable.
The focus therefore remains on the “faster than expected” disinflationary process, as stated in the minutes of the last meeting and as confirmed yesterday by Eurostat (in January -0.4% monthly and +2.8% annually in the eurozone , +0.3% and +0.8% in Italy), but not yet sufficient to abandon the rigid posture. With a side effect: the longer it is maintained, the more Frankfurt’s accounts will suffer. Which is the first to admit that it expects further losses in the coming years, even if they are lower than those of 2023. Even if the ax falls on rates, the red spots will not be removed so quickly from the ECB’s balance sheets.
