Eurozone central banks on losing end of ECB policies

Belgium, (Brussels Morning Newspaper) Eurozone central banks are on the losing end of European Central Bank (ECB) policies as it up interest rates to rein in rising inflation.

In the last ten years or so, the bank pumped cheap money into the financial system, which national central banks now have to repay as the ECB increases interest rates, according to Reuters reporting on Tuesday.

The ECB has been lending money to banks at negative rates for more than a decade, which put commercial banks in the position to make a profit by just keeping the money at their national central banks. Interest rates are out of the negative territory and are expected to reach 3% in 2023.

Éric Dor, economic studies director at IÉSEG School of Management, noted that commercial banks will make upwards of 30 billion euro if interest rates peak between 2.5% and 4.5%.

According to US financial services company Morgan Stanley, ECB’s policies will cost central banks in the eurozone approximately 40 billion euro next year.

He noted that central banks of Germany and the Netherlands, the most fiscally prudent EU member states, will suffer the most because they hold larger shares of bonds and deposits bought on the ECB’s behalf at negative rates.

Looming losses

Central banks have warned of coming losses, with the Dutch central bank warning that it is at risk of needing a bailout, which Finance Minister Sigrid Kaag later softened and stressed the option was “not yet on the table.”

On the other hand, central banks of EU member states with higher-yielding bonds, including Greece, Italy and Spain, will likely fare better. “It is clear that the Dutch and German citizens have never voter for such redistribution through the backdoor,” Dor pointed out.

Johan Van Overtveldt, member of the EP Committee on Economic and Monetary Affairs, warned that this could fuel division between taxpayers in the north of the EU and their southern counterparts.

His colleague on the committee Dorien Rookmaker warned “if taxpayers have to pay the bill, this may result in political instability and changes of government in Europe,” adding that “it is a dangerous path.”