Economy

Analysis-A decade of central banks largesse haunts taxpayers, as losses loom by Stocksak

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© Stocksak. FILE PHOTO – Signage seen outside the European Central Bank (ECB), building in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay/File Photo

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By Francesco Canepa

FRANKFURT, Stocksak – In order to keep the economy alive for more than a decade after the global financial crash, central bankers have pumped trillions into the financial system with cheap money. Now, their generosity is coming back to haunt taxpayers as well.

To combat runaway inflation, the Federal Reserve must raise interest rates and make large interest payments to commercial banks for deposits that they have made through massive bond purchases or cheap loans.

This is a terrible situation at a time when millions are struggling to pay their bills. Worse, they will not be able to contribute to the governments’ coffers. Some central banks in Europe may even require taxpayer assistance.

“The central bank continues sending money to the banks while we have to reduce our expenditure,” Lex Hoogduin (an economics professor at University of Groningen) said. He was also a former member of the Dutch central banking board. It’s mostly a political issue.

There are increasing calls for interest payments to banks to be cut, much to the dismay a sector that sees itself as having already suffered the brunt of a decade with low rates.

Michiel Hoogeveen (a Dutch lawmaker who sits on the European Parliament’s economic committee and oversees the ECB) is one of those who wants lenders to take the brunt.

Stocksak was told by he that “if the taxpayer ends up paying for the bill, that would be very unfair.”  

Paul Tucker, former Bank of England deputy governor, also urged BoE to reduce the interest on some of those reserves and save 30-45 Billion Pounds ($84.93Bld) in each of its next two financial years.

Morgan Stanley (NYSE: ) Estimates that every percentage-point increase in the BoE’s rate lowers remittances into the Treasury by 10 Billion pounds per year

The British government, which has received 120 billion pounds in BoE profits since 2009, has already set aside a transfer of 11 million pounds for the central banking institution.

The U.S. Treasury won’t have to worry about bailing the Fed out, as it can simply defer any loss. However, it will not receive the $50-100billion or so it has received from the central banks every year since the financial crash.

Jerome Powell, Fed chair, was likely to be under fire from lawmakers as funds will instead flow into banks, many which are foreign.

“The Fed won’t be bankrupt financially but it could be politically,” said Derek Tang, an economist at LH Meyer, a research firm.

(Federal Reserve remittances to the U.S. Treasury https://graphics.reuters.com/GLOBAL-CENBANK/byvrlorozve/chart.png)

ROD FOR OWN BACK

The ECB is the most affected by the problem. This week, the ECB will discuss ways to reduce its interest bill amid a host of legal, political and financial complications.

The central bank of 19 countries that share the euro has made a name for itself by lending money to banks at negative rates.

These individuals can now make a guaranteed income by simply storing their cash at their national central banks. They will earn a 0.75% annual return rate, which is likely to double this coming week and rise to 3% next.

According to Eric Dor (director of economic studies at IESEG School for Management in Paris), this arbitrage will net banks between 3 and 44.9 billion euros if the deposit rate peaks between 2.5% – 4.5%.

According to Morgan Stanley, it will cause losses of around 40 million euros for central banks in the euro zone next year.

Ironically, the central bank of the most fiscally prudent countries – the Netherlands, Germany, and to a lesser degree, Belgium – will be the hardest hit because they hold a greater share of bank deposits and the bonds that they purchased on behalf of the ECB yield zero or less.

They all warned of future losses, and the Dutch central banking openly stated that it could need a bailout. However, Sigrid Kaag, the finance minister, later cautioned that this was not yet on the table.

However, central banks in Spain, Greece, and Italy with lower cash reserves and higher-yielding bonds were likely to do better.

“It is obvious that the Dutch or German citizens have never voted to redistribution through a backdoor,” stated Dor, ISEG.

Johan Van Overtveldt from Belgium, is the chair of the EU Parliament’s Budget Committee. He stated that this could even make future decisions more complicated by fuelling the resentment towards taxpayers in their southern counterparts.

On the other side, the industry was already enraged by the idea of cutting bank remuneration.

Deutsche Kreditwirtschaft, the German banking lobby, said that any “change to the contractual conditions” could undermine trust in central banks. Bankinter, the Spanish lender, disagreed.

Citi estimates that Spanish and Italian banks were the most benefited from this so-called “carry trading” and would therefore be the biggest loser if it was discontinued.

However, the status quo could be too costly politically and economically.

According to AXA, the French insurer, an increase of the deposit rate to 3 percent will lead to a decrease in the euro area’s fiscal balance of 1% per year.

Dorien Rookmaker (a Dutch member of European Parliament’s Economic Committee) stated that “if taxpayers must pay the bill this might result in political instability, and changes of government, in Europe.” It is a dangerous way to go.

(Who wins the ECB cash giveaway? https://graphics.reuters.com/EUROZONE-MARKETS/gdpzqryowvw/chart.png)

($1 = 0.8831 pounds)

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