ANALYSIS-A decade of central bank largesse haunts taxpayers as losses loom


For more than a decade since the global financial crisis, central bankers have pumped trillions of dollars of cheap money into the financial system to keep the economy afloat. Now that largesse is coming back to haunt them – and taxpayers.

After raising interest rates to fight runaway inflation, the Federal Reserve and its European peers have to pay huge interest to commercial banks on the deposits the institutions themselves have created through massive bond purchases. and cheap loans. The optics of this are quite serious at a time when millions of citizens are grappling with a cost of living crisis. Worse still, it means they will have little or no money to pour into government coffers and some central banks in Europe may even need taxpayer help.

“The central bank continues to send money to the banks, while we have to cut our spending,” said Lex Hoogduin, professor of economics at the University of Groningen and former member of the bank’s board of directors. Dutch central. “So it’s mostly a political issue.” Indeed, calls are mounting to limit interest payments to banks, much to the dismay of a sector that sees itself as having already borne the brunt of a decade of low rates.

Among those who want lenders to take the hit is Michiel Hoogeveen, a Dutch lawmaker on the European Parliament’s Economics Committee, which oversees the ECB. “If the taxpayer ends up footing the bill, it will be very unfair,” he told Reuters.

Former Bank of England deputy governor Paul Tucker also urged the BoE to cut interest on some of those reserves and save 30-45 billion pounds ($84.93 billion) over the each of the next two fiscal years. Morgan Stanley estimates that every one percentage point increase in the BoE rate reduces remittances to the Treasury by 10 billion pounds a year.

The British government, which has received £120 billion in profits from the BoE since 2009, has already planned a transfer of £11 billion for the central bank. The US Treasury won’t have to worry about bailing out the Fed, which can simply defer any losses. But it will miss the roughly $50 billion to $100 billion it receives from the central bank every year since the financial crisis.

That meant Fed Chairman Jerome Powell was likely to face heat from lawmakers as funds would instead flow to banks, many of which are foreign. “The Fed won’t be financially bankrupt, but it could be politically bankrupt,” said Derek Tang, an economist at LH Meyer, a research firm.

BAR FOR OWN BACK For none is the problem more acute than for the ECB, which this week will discuss options for reducing its interest bill amid a web of political, legal and financial complications.

The central bank of the 19 countries that share the euro has made a beating for itself by lending money at negative rates to banks. They are now poised to make a guaranteed profit by simply collateralizing that money with their national central bank, earning an annual interest rate of 0.75% which is expected to double this week and is expected to reach 3% next year.

This arbitration will bring the banks 31 to 34.9 billion euros if the rate on deposits peaks between 2.5% and 4.5%, according to Eric Dor, director of economic studies at the IESEG School of Management in Paris. This will contribute to losses of around 40 billion euros for central banks in the euro zone next year, according to Morgan Stanley.

Ironically, the central banks of the most fiscally cautious countries – the Netherlands, Germany and, to a lesser extent, Belgium – will be the hardest hit because they store a larger share of bank deposits and bonds they bought on behalf of the ECB yield zero or less. They all warned of the losses ahead and the Dutch central bank openly said it might need a bailout, although Finance Minister Sigrid Kaag later warned that it wouldn’t. was “not yet on the table”.

In contrast, central banks with less cash and higher yielding bonds in Italy, Spain and Greece should fare better. “It is clear that Dutch and German citizens never voted for such a backdoor redistribution,” ISEG’s Dor said.

Johan Van Overtveldt, Belgian chairman of the European Parliament’s budget committee, said it could even make future decisions more difficult by stoking resentment among taxpayers in the north of the bloc towards their counterparts in the south. On the other hand, the idea of ​​reducing the remuneration of banks already aroused the wrath of the industry.

German banking lobby Deutsche Kreditwirtschaft said any “change in contractual terms could damage confidence” in central banks and Spanish lender Bankinter said it was not a “good idea”. Citi believes that Italian and Spanish banks benefited the most from what is known as the “carry trade” and would therefore be the biggest losers if it were removed.

But the status quo may be too painful economically and politically. An increase in the deposit rate to 3% will worsen the euro zone’s budget balance by 1% of GDP in the first year, according to French insurer AXA.

“If taxpayers have to foot the bill, it can lead to political instability and changes of government in Europe,” said Dorien Rookmaker, Dutch member of the European Parliament’s Economics Committee. “It’s a dangerous path.” ($1 = 0.8831 pounds)

(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)


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