The turnaround in interest rates is putting pressure on the central banks in the euro area and elsewhere.
(Photo: Bloomberg)
Many central banks are threatened with losses as a result of the interest rate turnaround. This could become a problem, especially in the euro zone.
On the one hand, national central banks such as the Bundesbank, the Banca d’Italia or the Banque de France have large stocks of low-interest government bonds due to the years of bond purchases in the euro area. The interest income they receive is relatively stable because of the long terms.
On the other hand, they immediately have to pay significantly higher interest rates on deposits to the banks. That cuts into their profits.
For the euro countries, this means that the respective national central banks will in future pay less profits to the finance ministries. This will exacerbate the problems in public finances. In any case, the countries have to pay significantly more interest for new debts.
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Some economists argue that it will take longer for the turnaround in interest rates to have an impact on national budgets. Highly indebted euro countries such as Italy have used the long period of low interest rates to borrow on good terms over the long term. As a result, the higher capital market interest rates are only having a gradual effect on debt servicing. But if you take into account that the national central banks are paying out fewer profits because of the turnaround in interest rates, the consequences should be felt earlier and more severely.
The same standards for the central banks would be important
How significant the effects are can be seen, for example, from the fact that the Italian central bank held around a quarter of the country’s bonds at the end of last year. As a result, the Italian state basically paid the interest on these bonds to itself. The money was transferred from the state to the central bank – which led to higher profits there. The central bank then returned the profits to the state.
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In view of the importance of the central banks for public finances, it is all the more important to communicate the consequences of the turnaround in interest rates transparently there. The monetary authorities should publish more details on this.
The central banks in Europe have different accounting standards.
(Photo: imago/Frank Sorge)
One problem is that every central bank in the euro area uses a different accounting system. The Bundesbank, for example, has taken a very cautious approach to its accounting. In recent years, it has already formed high risk provisions in order to be prepared for a possible turnaround in interest rates. As a result, she can now absorb losses more easily. Other central banks have not done this.
The same standards would be important simply because the same EU debt rules apply to all euro countries. In order for these rules to actually be the same, the numbers of the states must also be comparable. But they are not, if each central bank reports differently.
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