Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
While in theory central bank balance sheets could go to infinity (which of course would destroy a currency), the massive growth we’ve seen on global central banks assets as a % of GDP in the past 5 years is quite awe inspiring. How they are ever going to unwind these measures down the road is going to be one neat trick. For now, it is just an epic kick the can and partial monetization of debt (as shorer duration bonds hit maturity and go poof into the night)
The WSJ takes a look at the massive expansion – believe it not since Draghi [Feb 9, 2012: 100 Days of Mario Draghi] came to town he has actually pushed the ECB’s balance sheet (as a % of the region’s GDP) to the highest level among the West’s major central banks.
- The European Central Bank’s balance sheet soared past the €3 trillion ($3.96 trillion) mark last week after the ECB flooded banks with more than €500 billion in cheap loans, an indication of just how much risk the central bank has taken onto its books as it scrambles to limit the fallout from Europe’s debt crisis.
- The ECB’s balance sheet edges that of Japan’s central bank as a share of its economy, while easily surpassing those of others such as the Federal Reserve and Bank of England. The balance sheet, which includes assets such as gold, government bonds, covered bank bonds and loans to banks, rose more than €300 billion last week to a record €3.02 trillion, or one-third of the euro zone’s gross domestic product. That easily surpasses the Federal Reserve’s $2.9 trillion balance sheet, which equals 19% of U.S. GDP.
- The ECB’s balance sheet has doubled since the collapse of Lehman Brothers in September 2008 and has risen 50% since the central bank decided, in May 2010, to purchase government bonds of Greece and other fragile euro members.
- The ECB has purchased around €220 billion in government bonds. But its main crisis measure—with the biggest effect on the central bank’s balance sheet—has been the twin three-year loan operations in December and late February that pumped more than €1 trillion into the banking system. [Dec 20, 2011: LTRO – A New Acronym to Learn] A significant share of these loans was taken up by Spanish, Italian and other banks in Europe’s struggling periphery.
- The mix of bond purchases and loans has exposed the ECB and the 17 national central banks that make up the euro to losses in the event of defaults or bank failures. Last month, the ECB was forced to swap its €50 billion Greek bond portfolio for new bonds to shield the banks from potential losses in the event of any forced write-downs.
- If banks that have borrowed from the ECB can’t pay the money back and the collateral they have posted falls in value or becomes worthless, the ECB would be on the hook for losses. Most of these losses would be spread across national central banks according to their size, meaning Germany’s Bundesbank would face the largest exposure.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
