German Bundesbank suffers losses of EUR650 billion from government bond purchases

The German Bundesbank, the main shareholder of the European Central Bank (ECB), is encountering significant losses and may require recapitalization funds, putting it at risk of a bailout.

Germany’s economy is deteriorating, facing stagflation and an inflation rate exceeding 6%.

To address economic imbalances, the Bundesbank implemented a historic government bond purchasing program known as quantitative easing, which led to high inflation rates reminiscent of the 1970s.

The bank has accumulated losses of €650 (US$715) billion from purchasing German government securities, potentially necessitating a costly government bailout.

In March alone, the Bundesbank confirmed losses of €1 billion on its bond holdings, which is expected to worsen.

As the ECB’s main shareholder, accounting for 18% of its capital stock, the losses directly impact Germany.

Not only will the German government bear the burden of potential bailouts, but it is also the bank’s sole shareholder.

Consequently, it will no longer receive dividend payments or profit transfers, resulting in a substantial decline in total revenue for the Treasury.

The Bundesbank’s accounting profits transferred to the Treasury amounted to €22 billion in the last decade, which will no longer be available for tax revenue computation.

Germany’s public finances already suffer from significant imbalances, and the government has yet to implement substantial corrective measures.

Continued reliance on government bond purchases financed by monetary emission is no longer viable, leaving further indebtedness as the only feasible option.

The European Central Bank’s efforts to combat high inflation have led to a rapid increase in interest rates.

However, this has created a disparity between the interest the Bundesbank pays on deposits and the interest it receives on the government bonds it purchased, negatively impacting its balance sheet.

Bundesbank President Joachim Nagel stated the need to tap into emergency funds, including a war provisions fund of €19.2 billion and an additional emergency fund of €2.5 billion.

The bank also holds reserves of up to €170 billion in gold and foreign currency, which could potentially be utilized to meet liabilities.

Nonetheless, the main strategy will involve gradual repayment of losses using reserves, special funds, and future earnings, as was done in the past.

The bank denied on Monday a report that it might need a bailout to cover losses arising from the European Central Bank’s bond-buying scheme.