The ECB suffers its first red numbers in two decades due to the rise in interest rates

The turnaround that the European Central Bank (ECB) took starting in July 2022 has resulted in a drain on its annual accounts.

The monetary authority closed last year with losses of 1,266 million euros after provisioning another 6,620 million, according to the accounts released this Thursday by the entity after having been approved by its Governing Council.

For the first time since 2004, the institution chaired by Christine Lagarde registers red numbers, which it has reached due to the abrupt rise in interest rates after almost a decade of ultra-cheap money.

Eurobank still expects to incur losses in the coming years, but hopes to drain them off as it continues to reduce the size of its balance sheet and lower interest rates.

The ECB's red numbers have not been a surprise.

The results of central banks, inside and outside the euro zone, are being dyed red by the rapid tightening of monetary policy to quell inflation.

After the financial crisis, Frankfurt carried out an ultra-expansive policy to lift Europe out of economic hardship, with a recipe that consisted of low interest rates and massive debt purchases.

However, high inflation led the monetary institute to completely change that dynamic, raising the price of money from 0% to 4.5% in just over a year and a half.

In that same period, the deposit facility rose from -0.5% to 4%, so the remuneration for bank reserves had to be raised while income from debt yields on the balance sheet remained much lower. .

In reality, the 2022 results were already negative.

The ECB closed that year with a result of zero euros.

That is, it had neither profits nor losses.

Of course, it achieved that balance after provisioning 1,627 million euros.

In any case, it broke a streak of almost 20 years of profits in which it accumulated profits of 33.6 billion euros and which reached its peak in 2019, when it showed green numbers of 2.366 million euros.

Last year, provisions covered the bulk of losses that reached 7.8 billion euros.

The main consequence of the red numbers, as explained by the entity, is that “there will be no distribution of profits to the national central banks of the euro area for 2023.”

In a statement, the monetary institution recalled that the losses reflect “the necessary political measures of the Eurosystem to fulfill its main mandate of maintaining price stability” and that they do not “have any impact on its ability to carry out monetary policy.” effective".

What's more, Eurobanco highlights the strength of its assets, of 44.5 billion euros.

“The ECB can operate effectively and fulfill its primary mandate of maintaining price stability regardless of any losses,” the note emphasizes.

According to the entity, the higher expense was due to the increase in interest rates on main financing operations, which went from 0.6% in 2022 to 3.8% in 2023. On the income side, they increased

seigniorage

, that is, for the euros in circulation.

The ECB accounts also include the reduction in the balance sheet that the entity has been making since the inflationary crisis began.

Already in 2022 it reduced it from 8.56 to 7.95 billion euros.

Last year he pruned it one billion more, leaving it at 6.9 billion euros.

The bulk of this drainage is due to the decrease in the Eurosystem's loan operations, of 1.3 trillion 410,000 million euros thanks to the maturities and early repayments of the cheap liquidity lines that the Eurobank granted to banks, the so-called TLTROs. .

Also contributing to this reduction was the end of purchases and reinvestments linked to the bond purchase program launched by Mario Draghi, known as APP (for its acronym in English), which caused these holdings to fall by 228 billion, to 3 trillion. euros.

The slowdown of the other plan, linked to the pandemic (called PEPP) also reduced that portfolio by 15 billion, to 1.6 trillion.

The reinvestments of that plan will remain alive this year, but will slow down until they end at the end of 2024.

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