Europe’s money-printing spree risks triggering bailouts across the Continent as governments pay the price of a decade of cheap money.
BNP Paribas warned there was a growing risk that some of the bloc’s biggest economies “may have to be recapitalised” as the European Central Bank (ECB) continues to shrink its balance sheet.
The International Monetary Fund (IMF) recently warned that central banks in the bloc faced “large” losses of around €55bn (£50bn) over the next two years alone, with Germany’s Bundesbank “likely to see the largest and most persistent losses”.
An IMF staff paper said these losses would wipe out the German central bank’s reserves in a move that would take more than a decade to fully recoup.
Authorities in both Germany and the Netherlands have already acknowledged that bailouts may be necessary as losses mount, even though they are able to carry forward losses on their balance sheets, unlike the Bank of England.
The ECB bought €5 trillion of bonds during the eurozone crisis and the pandemic in an attempt to support economies and bring down borrowing costs. This quantitative easing was financed by creating new money to buy up the bonds.
However, the huge portfolio of debt on central banks’ balance sheets is now loss-making after a rapid rise in interest rates.
This is because central banks are paying more in interest to commercial banks on reserves than central banks earn in interest on their stockpile of bonds. They are being forced to dip into reserves to make-up the difference.
Paul Hollingsworth, chief European economist at BNP Paribas, said: “These core economies are making quite sizeable losses… and it’s a question of, how long and how deep are the losses over time?
“It’s not our central case, but there is the risk that the national central banks at some point might have to be recapitalised. And that obviously raises fiscal questions.”
Mr Hollingsworth’s comments suggest that governments may be forced to cut spending or raise taxes if central banks require bailouts.
The ECB and Bank of England still hold more than a quarter of their governments’ outstanding debt.
The IMF noted that if all the ECB’s QE stockpile were sold at once it would result in losses of €1 trillion to the eurosystem at current market prices, “wiping out all the buffers” in place to absorb losses.
The IMF stressed the figure reflected an accounting exercise rather than their reality facing Europe.
Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month, then enjoy 1 year for just $9 with our US-exclusive offer.