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ECB Could Post Loss After Bond Buying, Jeffries Says

Dec. 15 (Bloomberg) -- The European Central Bank risks posting a loss for this year as its emergency bond purchases surpass its level of reserves, Jeffries International Ltd. said.

While most of the government bonds purchased this year will “probably reside” on the balance sheets of national central banks in the euro area, a “back-of-the-envelope calculation” suggests the ECB’s holdings could exceed reserves by Dec. 31, David Owen, chief European economist at Jefferies in London, said in a report today.

The Frankfurt-based central bank has bought 72 billion euros of bonds so far, and stepped up purchases last week even as policy makers increased pressure on governments to do more to end the debt crisis. ECB President Jean-Claude Trichet said on Dec. 2 that the program, which it started in May in response to the Greek sovereign debt crisis, is “ongoing.”

The ECB may ask members for a capital increase to safeguard against any losses stemming from its purchases of bonds from strained governments such as Portugal and Ireland, according to a euro-area central bank official with knowledge of the talks. Owen said it would “hardly be surprising if the ECB increased the size of its capital base” to protect itself.

Profit & Loss

The Jeffries’ economist estimates the ECB will have about 5 billion euros ($6.7 billion) of bonds on its balance sheet this year, which compares with capital of 4.1 billion euros at the end of 2009. The central bank posted a profit of 2.3 billion euros in 2009 and 1.3 billion euros in 2008. Given this profit, “it would not take much to push it into a loss, which would have to be covered by reserves,” Owen said.

“Being marked to market and going through the profit and loss raises the risk of the ECB potentially disclosing a small loss,” he said. “Not that this would really be a problem, but in the current environment, it would probably not help market sentiment.”

ECB Governing Council member Ewald Nowotny raised the issue of capital increases for national central banks last week.

“We are clearly seeing that risks are increasing in the system for European central banks because we are having to take on a whole range of extra risks,” Nowotny, who is also governor of Austria’s central bank, said in Vienna on Dec. 10. “So in the whole European system we’ll have to get a better capital base for central banks.”

To contact the reporter on this story: Gabi Thesing in London at

To contact the editor responsible for this story: John Fraher at

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