There
seems to be a lot of confusion regarding to how the ECB accounts for its
Securities Markets Program (SMP) holdings. The reason it matters is because if
the ECB is to participate in the PSI restructuring it would have to take a
loss. And depending on how big the loss is, it would need to either ask its
shareholders for a capital increase or absorb the losses.
SMP is
recorder in the ECB balance sheet under item 7.1. Currently it stands at
282billion. Market wisdom has it that around 45-55billion are Greek bonds that
were bought during the futile attempts in 2010 to stabilise the market. One
could guess-estimate that the average price the ECB paid for these Greek bonds
is in the range of 75-85%. It is also widely believed that most of the
purchases were near maturities, namely mostly up to 2013-14, but this is not
confirmed. We also do not know if any of the proceeds of the already matured
bonds were reinvested into other Greek bonds or not.
ECB Booking
The
bonds held under the SMP program are held as HTM (Hold To Maturity). According
to the official Guidelines they are
marked at cost and are amortised. Here is an excerpt from the Official Journal
of EU (ECB 2010/20, 11Nov 2010). So for example if the March 12 was bought at
80% in may 2010 then it should now be at around 98.4% as there are only 54 days
to maturity. This would represent losses of around 48% on its March 12
holdings.
ECB Capital and reserves
Item 12
on the liability side of the ECB balance sheet is Capital plus Reserves. The
total is 81.5billion. Out of these 81.5billion 10.79billion is the paid up
capital of the ECB. It is paid by the National Central Banks (NCB’s, Germany
19%, France 14%, Italy 12% etc). The rest according to the guidelines is “Legal reserves and
other Reserves. Retained Earnings.The
contributions from NCBs to the ECB in accordance with Article 48.2 of the
Statute of the ESCB are consolidated with the respective amounts disclosed
under asset item 9.1 ‘Participating interest in the ECB”
Thus the rest of 70billion represents the reserves that the NCB’s
had prior to joining the ECB which were transferred to the ECB in accordance to
their shareholder participation plus any retained earnings. A glance at the
historical data shows that around 50billion came from the accounts of the NCB’s
reserves. The rest of 15-20billion is most probably the profit that has been
retained over the years.
Thus it may be possible for the
ECB to shoulder some of the pain. The problem however is more political rather
than financial. Europe refused back in March 2011 to relieve the ECB from its
Greek holdings. It is also not exactly reassuring when a central bank losses
money and face. It also reflects on the ECB’s independence with regards to EU
political influences.
Gold Revaluation to the rescue?
Many believe that the loss could be absorbed by a simple revaluation of the ECB's gold reserves or other assets. This however, seems to be difficult (not impossible) in view of their Profit and Loss rules:
INCOME RECOGNITION
Article 13
Income recognition
1. The following rules shall apply to income recognition:(a) realised gains and realised losses shall be taken to the profit and loss account;
(b) unrealised gains shall not be recognised as income, but recorded directly in a revaluation account;
(c) at year-end unrealised losses shall be taken to the profit and loss account if they exceed previous revaluation gains registered in the corresponding revaluation account;
(d) unrealised losses taken to the profit and loss account shall not be reversed in subsequent years against new unrealised gains;
(e) there shall be no netting of unrealised losses in any one security, or in any currency or in gold holdings against unrealised gains in other securities or currencies or gold;
