Fitch Ratings, a global credit rating agency, on Monday 9 September 2024, that the Eurosystem, comprising the national central banks of the euro area and the European Central Bank, is expected to incur losses exceeding €160bn from 2024 to 2028, before accounting for provisions, reserves and taxes. This anticipated financial strain arises from higher interest expenses on commercial bank reserves, which have surged due to extensive quantitative easing (QE) over the past decade.

The projected losses represent an average annual impact equivalent to 0.2% of the eurozone’s gross domestic product. Fitch noted that these losses would gradually decline as the ECB lowers its policy rate and reduces the size of its balance sheet.

According to the report, these sustained losses will significantly impact the capital reserves of central banks within the Eurosystem. They will also prevent the central banks from making transfers to their respective governments, potentially placing additional pressure on public finances. However, Fitch did not foresee any direct implications for the credit ratings of the Eurosystem’s member institutions. Of the four largest euro area NCBs examined in the report, the central banks of France and Germany are expected to bear the brunt of the financial strain. The German Bundesbank had already exhausted its remaining provisions against risk in 2023.

Fitch further stated that these financial losses were not expected to influence the ECB’s monetary policy decisions. The report underscored that the risk to the credibility of monetary policy due to these persistent losses was limited by the fact that governments would likely not need to recapitalise their central banks. Despite the significant losses, Fitch estimated that both the Eurosystem as a whole and the four largest NCBs, which includes the central banks of France, Germany, Italy and Spain, should maintain positive overall net equity, allowing them to carry forward the losses without immediate concern.

In addition to losses stemming from increased interest on reserves, Eurosystem central banks have incurred “paper” valuation losses of up to 3% of eurozone GDP on bonds acquired during QE programmes. However, Fitch clarified that these losses would only be realised if the bonds were sold before their maturity dates.

The financial impact on national governments, according to Fitch, was expected to be limited to the reduction in the NCBs’ budget contributions. These contributions had been boosted during the era of quantitative easing, averaging 0.1%-0.2% of GDP annually for the four largest NCBs between 2009 and 2023. While the decline in transfers will add to fiscal challenges, the overall effect on national budgets is expected to be modest, given the size of the contributions during the QE period.

A spokesperson for the ECB told Delano that while the ECB cannot comment on behalf of the NCBs, its own annual accounts report, on 22 February 2024, does anticipate losses. The report states, “The ECB is likely to incur losses over the next few years, but is then projected to return to making sustained profits. The financial strength of the ECB is further underlined by its capital and its substantial revaluation accounts, which together amounted to €46bn at the end of 2023. In any case, the ECB can operate effectively and fulfil its primary mandate of maintaining price stability regardless of any losses.”