What does this Barclays Capital chart remind you of?
Tips of the iceberg? Vertiginous, frigid, Arctic depths?
That might be appropriate. Those figures show that eurozone central banks have lost €5bn on the European Central Bank’s sovereign debt-buying, based on current market prices for Greek, Irish and Portuguese bonds.
Bear this number in mind. We earlier cased out ECB plans to ask for an increase in its capital in order to protect against this kind of loss — plans made with impeccable timing, in fact, just as politicians are looking to it for more bond purchases, in more sovereigns, in order to calm markets.
But, as BarCap explain, purchased bonds are held to maturity — hence any mark-to-market (MTM) losses won’t show up on the ECB’s balance sheet until actual impairment in the bonds’ value.
Still, they’ve had a go at estimating the losses anyway, based on their assumption that the ECB mostly bought Greek bonds before autumn, when it increased the proportion of Irish and Portuguese purchases during the return of contagion. (Looks like a fair assumption, based on this purported recent shopping list of securities, for example.)
Add in that these purchases probably targeted maturities below five years because of those distorted peripheral yield curves, and you can compare them to total return indices that include these bonds.
Thus, as BarCap conclude:
Our best guess is that overall, the Eurosystem MTM on the SMP programme is currently about -EUR5bn. Given a total size of the SMP of EUR72bn at present, this implies a loss of about 7%, versus a flat performance for the euro all government index as a whole over the same period…
Given the weights of the various central banks in the Eurosystem, the loss that would be attributable to the ECB itself (rather than the Eurosystem) would be less than 10% of that, ie, less than EUR500mn.
For the sake of completeness, BarCap also calculate around €150m of interest payments on the operations the ECB uses to sterilise its bond purchases.
Add it up, and this isn’t exactly a clear and present danger to the ECB’s balance sheet, given how losses would fall on the national central banks first — though it’s worth considering the position of institutions like the Central Bank of Ireland, or the Bank of Greece, all the same.
There’s one final MTM irony to contemplate, incidentally.
After all, this year’s European bank stress tests also modelled MTM volatility in five-year peripheral sovereign bonds, in an adverse but unlikely scenario of huge yield increases over 2010. Sadly, adversity became reality: real-world bond yields actually ended up matching or surpassing the scenario. Not a great advertisement for the particular regulators roped in to do the calculations, then. And who were they?