Euro zone central banks printed billions of euros before QE

Euro zone central banks have quietly bought hundreds of billions of euros worth of assets over the past decade using an obscure facility that allows them to print some money for purposes other than monetary policy, an academic study has revealed.

While the European Central Bank’s €1.5 trillion quantitative easing programme is well known, the existence of this separate scheme to buy bonds and other assets was first publicised this week by researcher Daniel Hoffmann.

His study - part of his PhD thesis and now published with a foreword by Hans Werner-Sinn, one of the ECB’s harshest critics in the German public debate-- has intensified criticism in Germany of the euro zone central bank’s lack of transparency.

Total assets held by national central banks (NCBs) beyond their normal monetary policy operations swelled to €623 billion late last year from €214 billion in 2005, according to Mr Hoffman, who aggregated data from NCBs’ balance sheets.

The study raises questions about NCBs’ use of this scheme -- which is meant for non-monetary purposes, such as the management of central banks’ pension funds - especially during the 2008-12 financial crisis, when rising government bond yields pushed several countries to seek financial assistance.

Significant pick-up

The purchases picked up significantly in the crisis years, especially those by the Central Bank of Ireland, and the central banks of France, Italy and Greece.

“I see no problem in being more transparent on this matter,” ECB executive board member Peter Praet said in a Handelsblatt interview published on Thursday. “But the decision has to be taken by the Governing Council.”

The ECB said on its website on Thursday that no “uncontrolled money creation” can take place using the facility, known as Agreement on Net Financial Assets (ANFA), because there is a cap on how much each NCB can buy to prevent it from interfering with monetary policy.

But these limits are not published, and while NCBs have to inform the ECB of what they buy, not all of them make such details public.

The research found that assets classified as “other securities” in the balance sheet of national central banks, which are those purchased with self-created money, jumped from €122.6 billion in 2005 to €374.9 billion in 2014.

They now stand at €358.2 billion, according to the consolidated financial statement of the Eurosystem.

“This increase in volume ... almost entirely escaped the public eye,” Mr Hoffmann said in the study.

A Eurosystem source said total assets held by euro zone central banks for non-monetary purposes stood at €575 billion euros at the end of 2014. That compares with a monthly spend of €60 billion 4 under the ECB’s asset-purchase programme, launched in March and now scheduled to run for 25 months, implying an overall size of €1.5 trillion.

Questions raised

Mr Hoffman’s figures raise questions about whether the NCBs’ purchases might have contributed to financing heavily indebted euro zone governments or struggling institutions.

The ECB’s governing council can, with a two-thirds majority, veto any action by an NCB that it finds would interfere with Eurosystem’s tasks and ECB president Mario Draghi dismissed any concern about foul play.

“I would exclude completely any possibility of monetary financing,” he said last week. “They (the NCBs) are not buying from the primary market, and their investment policies are pretty broad-based.”

Reuters