Bundesbank rejects weak euro-zone bonds
Baku, March 31 (AZERTAC). The central bank of Germany will no longer accept bank bonds backed by Ireland, Greece and Portugal as collateral, becoming the first euro-zone central bank to exercise a new privilege to protect its balance sheet from the region`s debt crisis.
The decision signals the determination of the Deutsche Bundesbank to limit risks from the nonstandard measures the European Central Bank has taken to combat market stress during the crisis.
More broadly, it reflects concerns that the ECB`s crisis-fighting measures may be encouraging banks to shift debt of dubious value to central-bank balance sheets, ultimately exposing taxpayers to what may wind up being toxic assets.
Last week, the ECB gave the 17 national central banks in the Eurosystem permission to reject collateral bonds backed by governments that have received a bailout from the European Union and International Monetary Fund or whose credit rating falls below ECB standards.
Taking advantage of that freedom, the Deutsche Bundesbank has decided to no longer accept bonds guaranteed by Ireland, Greece and Portugal, starting with €500 million ($665.1 million) already on its balance sheet, a spokeswoman said on Friday. All three countries are receiving loans from the EU and the IMF to keep their governments afloat.
"Our credit assessment of these government-guaranteed bank bonds does not meet the minimum requirements for collateral," the Bundesbank spokeswoman said. She added that to her knowledge the Bundesbank is the first euro-zone national bank to reject such bonds.
At the end of February, German-based banks had a total of €47.50 billion in borrowings from the ECB, using the Bundesbank as their counterpart. The €500 million it holds in collateral therefore only affects 1% of German banks` borrowings.
The Bundesbank`s action in any case won`t protect it from losses if the Eurosystem has to restructure defaulted collateral, as losses on collateral held through the ECB`s normal monetary-policy operations are shared among all 17 of the national central banks in the euro zone, as well as with the ECB itself.
This explains why the Bundesbank increased its provisions for general risks by €4.1 billion to €7.7 billion in 2011, following a rise of €1.6 billion in 2010, results released earlier this month showed.
Bundesbank President Jens Weidmann reacted strongly after the ECB relaxed collateral rules for its second three-year loan tender in February. The looser rules allowed smaller banks to take part in the loan operation, which garnered €529.5 billion in loans to 800 euro-zone banks.
Weidmann touched on the risks in a letter to ECB President Mario Draghi last month, a person familiar with the matter said earlier in March. Mr. Weidmann, who is a member of the ECB`s governing council, had voted against the collateral change.
Although the new ECB decree is unlikely to stop the ECB from lending to banks offering as collateral bonds backed by Ireland, Portugal and Greece via their respective central banks, it was seen as something of a victory for Mr. Weidmann.
"Our task is to maintain price stability and provide banks with liquidity against sufficient collateral," Mr. Weidmann said in an interview with German TV station ZDF March 13.
The move to reject such bank bonds will take some weeks, the Bundesbank spokeswoman said, because the German central bank must first change its "terms and conditions" and publish the new terms. It must also notify its business partner banks, she said.
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