© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: February 21, 2013 7:42 pm
Eurozone central banks made up to €14bn last year from holding sovereign bonds of crisis-hit countries that cutting spending to meet deficit-reduction targets, official data suggest.
The European Central Bank said it earned €1.1bn in interest income from its share of a €208bn portfolio of sovereign debt issued by Italy, Greece, Spain, Portugal and Ireland. The bonds were bought under the now-defunct Securities Markets Programme, which ran from mid-2010 and was designed to calm financial market fears of a eurozone break-up.
The ECB published a previously confidential breakdown of the portfolio – revealing, just days before Italy’s general election, that Rome was by far the biggest beneficiary of the bond-buying with €99bn of its bonds being held by the SMP at the end of 2012.
The ECB’s declared profit represents just 8 per cent of the total portfolio, with the rest being retained among the eurozone’s 17 national central banks who helped conduct SMP operations. Assuming the yield on the ECB’s share of the portfolio is roughly the same as the rest, that implies total interest income of about €14bn.
Although that figure is still relatively small compared with the fiscal consolidation taking place across Europe, for smaller countries it is far from insignificant. Ireland, which this month conducted a complex swap of debt instruments that it incurred bailing out banks, was trying to lower an annual interest payment of €3.1bn that was more or less equivalent to the amount of austerity measures it is implementing every year.
With the exception of Greece, where European leaders agreed to channel profits from the SMP programme back to Athens, the gains from the bonds will be treated like any other central bank profit and can be kept or sent back to national governments at those banks’ discretion. That also means the profits can be kept by central banks in countries such as Germany that have fared better through the crisis.
Sony Kapoor, director of the think tank Re-Define, said although there was a moral case for channelling SMP profits back to other crisis-hit countries, it was unlikely to happen in an environment where most eurozone countries were struggling to hit budget deficit targets.
“Look at the Netherlands ... Every billion euros of forgone profit for the Dutch central bank and the Dutch treasury will translate into an additional cut they will have to make somewhere else,” he said. “That is politically very tricky.”
No breakdown is publicly available of which central banks were most active in SMP operations but of the declared ECB profits, the German Bundesbank will retain the largest share as it represents the largest share of the ECB’s capital key, which is used to distribute ECB profits among national central banks.
In figures released with annual accounts to increase the transparency of its operations, the ECB also said it earned €555m last year and €654m in 2011 on its Greek bond holdings. Because the SMP bonds still pay interest and were bought at depressed prices, they yield a lot of interest.
News, comment and analysis on the latest developments in the eurozone
“It’s important for these figures to be published so that people here realise the extent of the support the ECB has provided to Greece during the crisis,” a Greek banker, who declined to be identified, said. Like the other members of the “troika” that also includes the EU and the International Monetary Fund, the ECB has been demonised by leftwing Greek politicians opposed to the harsh terms of the country’s international bailout.
The ECB and the 17 national central banks, known collectively as the Eurosystem, will hold the bonds to maturity. The ECB’s accounting treatment works out interest income from the bonds by combining actual coupon payments and a paper profit derived from amortising its value over time – which suggests a zero chance of a default.
The SMP programme was wound down last year but has been replaced by another bond-buying programme that stands ready to buy more government debt as part of a pledge by Mario Draghi, ECB president, to do “whatever it takes” to prevent a break-up of the euro.
The ECB, which declared a net profit of €998m for 2012, up from €728m the year before, pays its profits to the other Eurosystem central banks, which then declare their own profits before passing money to national governments. Only then can any declared profits on Greek bond holdings be returned to Athens.
At the end of 2012, the other SMP portfolio holdings included €30.8bn in Greek debt, €43.7bn in Spanish paper, €21.6bn in Portuguese debt and €13.6bn in Irish bonds.
The ECB accounts also showed that Mr Draghi’s basic pay for last year was €374,124 – more than twice what Ben Bernanke receives as chairman of the US Federal Reserve but significantly less than Mark Carney, the incoming governor of the Bank of England is to be paid.
Additional reporting by Kerin Hope in Nicosia
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in