ECB unveils €5-billion capital increase

The European Central Bank said Thursday that it will nearly double its subscribed capital by 2013 due to greater volatility in financial markets and interest rates, and heightened credit risks.

ECB unveils €5-billion capital increase
Photo: DPA

An ECB statement said the bank would increase its subscribed capital by €5 billion ($6.6 billion) to €10.76 billion in three stages over the next two years, its biggest capital increase ever, and the first general hike in 12 years.

“The capital increase was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk,” it added.

Exceptional measures including a massive boost in loans to commercial banks and the purchase of corporate and sovereign bonds has raised the level of risk carried by the ECB, and the move should provide a buffer against potential losses, economists said.

The bank will also be able to raise provisions against losses by an equal amount, “starting with the allocation of part of this year’s profits,” which will provide an extra safety cushion.

The increase was “motivated by the need to provide an adequate capital base in a financial system that has grown considerably,” the statement said.

Following an initial increase in contributions by members of the European System of Central Banks on December 29, two more installments are to be paid at the end of 2011 and 2012, the bank said.

They are to total €1.163 billion per year, with each central bank contributing according to its share in the ECB’s capital.

Germany is the biggest contributor, with 18.9 percent at present, followed by France and Italy, with 14.2 percent and 12.5 percent, respectively. The eurozone will grow on January 1 to 17 members, with the accession of Estonia.

Central banks in countries that do not belong to the eurozone, such as Britain and Denmark, will see the percentage of their contributions fall from seven percent to 3.75 percent.


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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.