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Bundesbank profits stall as eurozone risks grow

The eurozone debt crisis is not yet over, even if calm appears to have returned to the financial markets, the Bundesbank warned on Tuesday as it set aside billions of euros in new risk provisions.

Bundesbank profits stall as eurozone risks grow
Photo: DPA

“Even if reform policies are kept to, the necessary adjustments in the crisis countries are still going to take years,” the head of the German central bank, Jens Weidmann, told a news conference.

“The growth rates seen before the crisis, which were partially artificially inflated, will not be achievable for a long time,” he said.

Weidmann also complained that policymakers in some countries still lacked a clear direction.

“The reform process has stalled in France; in Italy, the elections have cast a question mark over it and the situation in Cyprus is even less clear,” he said.

“The crisis is thus not over, despite the calm that has returned to the financial markets in the interim,” the central bank chief insisted.

Turning to Germany, Europe’s biggest economy which has managed to escape the recession that many neighbours still find themselves in, Weidmann said: “the German economy was still in good shape … despite the difficulties in many European partner countries.”

Nevertheless, the long-running crisis “represents the most significant risk for the economy in Germany,” Weidmann warned.

“Only some of the confidence lost as a result of the crisis has been recovered so far,” he noted.

As the year progressed, growth could be expected to become stronger, but this would depend on the absence of further shocks to confidence, he argued, insisting that it was up to politicians, not Europe’s system of central banks to solve the crisis.

The Bundesbank’s net profit for last year rose only slightly from a year earlier, because the central bank had decided to set aside billions of euros more in risk provisions, Weidmann continued.

The bank’s 2012 net profit amounted to €664 million, compared with €643 million in 2011.

The entire amount – which is less than half the €1.5 billion that Finance Minister Wolfgang Schaeuble had been hoping for – was transferred to the federal government.

“Despite significantly higher interest income, there was scarcely any rise in the profit owing to a further steep increase in risk provisioning,” Weidmann said.

Interest income is a central bank’s most important source of income and net interest income rose to €8.3 billion last year from €4.8 billion a year earlier.

“The steep €3.5 billion rise is due mainly to strong balance sheet growth on account of the crisis,” Weidmann said.

The central bank boosted its provisions for general risks, including inflation and exchange-rate risks, by €6.7 billion to €14.4 billion, he said, pointing to “further heightened risks stemming from monetary policy operations in the wake of the financial and sovereign debt crisis.”

As part of its wide armory of anti-crisis measures, the European Central Bank embarked on a controversial programme, known as SMP, to buy up the sovereign debt of countries hit hardest by the crisis.

Out of a total €208.7 billion worth of bonds acquired, Italian sovereign debt accounted for nearly half or €99 billion.

Spain followed in second place, accounting for €43.7 billion of the bonds bought, Greece for €30.8 billion, Portugal for €21.6 billion and Ireland for €13.6 billion.

Weidmann refused to reveal exactly how much of the Bundesbank’s risk provisions covered the bonds bought up under the SMP programme, saying merely it was around “one third”.

AFP/mry

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ECONOMY

German cabinet agrees record levels of new debt for 2021

The German government agreed Wednesday to take on record borrowing this year to weather the economic blow of the coronavirus pandemic.

German cabinet agrees record levels of new debt for 2021
Finance Minister Olaf Scholz. credit: dpa | Kay Nietfeld

In budget adjustments signed off by Chancellor Angela Merkel’s cabinet, Europe’s largest economy will borrow a total €240.2 billion in 2021, a third more than initially planned.

The adjusted budget, which will see Berlin break its taboo on new debt for the third year in a row, still has to be approved by parliament.

“We have decided to suspend the debt brake once again, and I think that’s justified,” Merkel told the Bundestag lower house, adding that the budget was “measured” despite “more insecurity” than usual.

“We are taking the right measures to manage the economic and financial effects of the pandemic,” added Finance Minister Olaf Scholz.

After maintaining a budget surplus for the last decade, the economic slump caused by the pandemic has forced Berlin to take on €370 billion in new debt in 2020 and 2021, with an extra €85.1 billion planned for 2022.

With the country facing a dangerous third wave and shutdown measures extended into April, Germany’s recovery has proved slower than expected this year.

Having originally planned to halt borrowing in 2022, the government is now aiming to return to its golden rule of fiscal discipline a year later, with only €8.3 billion of new debt in 2023.

The so-called “debt brake” is a rule enshrined in the constitution which forbids the government from borrowing more than 0.35 percent of gross domestic product (GDP) in a year.

READ ALSO: Merkel admits Easter coronavirus shutdown plan her ‘mistake alone’

Germany smashed the taboo in 2020 and 2021 as it scrambled to shield businesses and workers from the economic hit of the coronavirus.

The state has already paid out more than 114 billion euros of financial support to businesses since the beginning of the pandemic in the form of guaranteed loans, direct aid and shorter-hours work schemes.

Yet according to a report published by the German Economic Institute on Wednesday, the crisis has still cost the German economy 250 billion euros so far.

Extended restrictions

Hopes of a recovery this year have been dashed with entire sectors of the economy idled for months and the government revising down its 2021 growth forecast to three percent in January.

As a third wave of the pandemic tears through Europe, Germany extended shutdown measures by another several weeks at a marathon meeting between Merkel and state premiers on Monday.

Though plans for a strict five-day lockdown over Easter were scrapped Wednesday, businesses such as non-essential shops, leisure facilities and cultural venues will still remain largely closed until at least April 18.

In a report published Monday, the Bundesbank central bank predicted that restrictions would see economic output “contract markedly” in the first quarter of 2021.

The measures have also been met with growing frustration from business organisations, with the German Commerce Association warning that 120,000 shops could be forced to close if the measures continue to drag on.

The issue of taking on new debt, meanwhile, has also sparked heated political debate ahead of a September general election.

In January, Merkel’s chief of staff Helge Braun caused a major ruckus within his own CDU party when he suggested that the rule on fiscal discipline should be lifted for several years to come.

SEE ALSO: ‘We have finances well under control’: Germany takes on less debt than expected in 2020

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