By Agency Reporter

Wednesday, 15 Dec 2010

The European Central Bank may ask members for a capital increase to protect itself from any losses stemming from its government bond purchases, said a euro-area central bank official with knowledge of the talks, Bloomberg reported on Tuesday.

Any new money would come from the 16 national central banks which use the euro and contribute most of the ECB‘s 5.8 billion euro ($7.8bn) capital base, the ECB‘s statutes show. The matter may be discussed at the next Governing Council meeting on December 16 and no decision has yet been made, said the official, who spoke on condition of anonymity. Germany would view any ECB request positively, a government official said.

The debate suggests the ECB is concerned its programme to buy the bonds of strained governments such as Portugal and Ireland, which now totals 72 billion euros, may end up saddling its balance sheet with losses. Bundesbank President, Axel Weber, opposed the purchases when they were introduced in May and the risk is that seeking support could raise new questions about the ECB‘s independence from politics.

”The link to this potential hike in ECB capital and what‘s going on in the markets is certainly the fact that the ECB is buying government bonds which are not AAA-rated and are more risky than bunds,” said Chief Euro-Region Economist for UniCredit SpA in Milan, Marco Valli.

An ECB spokeswoman declined to comment. The ECB‘s potential capital request was reported by Reuters late on Monday.

Any increase would be supplied by the national central banks according to their capital subscription keys, according to the ECB website. The formula is calculated using the respective country‘s share in the total population and gross domestic product of the European Union.

Germany‘s Bundesbank is the largest contributor with 18.9 per cent, followed by the French and Italian central banks, with 14.2 per cent and 12.5 per cent, respectively. The Bank of England and other non-euro members contribute 7 per cent of the ECB‘s subscribed capital.

According to the ECB‘s statutes ”the Governing Council, acting by the qualified majority” shall ”determine the extent to which and the form in which the capital shall be paid up.”

ECB officials have been putting pressure on the governments to do more to end the region‘s sovereign-debt crisis on concern the central bank is shouldering too much of the burden. President Jean-Claude Trichet said late on Monday leaders should consider extending and broadening the region‘s bail out fund. Standard & Poor‘s on Tuesday cut the outlook on Belgium‘s credit rating to negative from stable.

Austrian central bank Governor Ewald Nowotny raised the issue of capital increases for national central banks last week.

”We are clearly seeing that risks are increasing in the system for European central banks because we are having to take on a whole range of extra risks,” Nowotny said in Vienna on December 10. ”So in the whole European system we‘ll have to get a better capital base for central banks.”

 

Source: Punch