ECB capital hike a warning to EU leaders, economists say

16th December 2010, Comments 0 comments

The European Central Bank will nearly double its capital to protect against market volatility and risks, it said Thursday in what may also be a warning to EU political leaders.

An ECB statement said the bank would raise its subscribed capital by five billion euros (6.6 billion dollars) to 10.76 billion euros in three stages by 2013, 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 huge loans to commercial banks and public debt purchases have raised the level of risk faced by the ECB, and the move should provide a buffer against potential losses.

The central bank can now raise provisions held against losses by an equal amount to 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 ECB said.

It was unveiled as European Union leaders gathered in Brussels to try and come up with long-term measures to protect the euro amid a debt crisis that has already slammed Greece and Ireland and threatens Portugal and possibly Spain.

ECB president Jean-Claude Trichet urged Monday that a 440-billion-euro fund known as the European Financial Stability Facility be strengthened, a move that Germany says is not necessary at present.

"We are calling for maximum flexibility, and I would say maximum capacity, quantitatively and qualitatively," for the EFSF, Trichet said.

ECB officials are worried that the central bank has taken on risk better borne by governments, and a German politician warned this week that it could become Europe's "bad bank."

Germany, France and other eurozone countries also oppose the creation of a common E-bond that would relieve pressure on countries struggling with debt but raise borrowing costs for those that have maintained healthier finances.

Several analysts said the ECB capital increase could be seen as a prudent accounting measure and as a message to eurozone governments.

Deutsche Bank economist Gilles Moec said one possible message was that there was no such thing as a "free lunch" for governments because they would take part in the increase via contributions from their central banks.

Commerzbank's Michael Schubert said: "The bank wants to send a clear signal to politicians that the bank's bond purchases are not without risk, i.e. the bank is likely to keep them as limited as possible."

To date, the ECB has bought 72 billion euros in bonds issued mainly by Greece, Ireland and Portugal, traders say.

Now, members of the European System of Central Banks will be expected to boost their ECB contributions on December 29, and pay two more installments at the end of 2011 and 2012.

The increase is amount to 1.163 billion euros per year for eurozone countries, with each central bank contributing according to its share in the ECB's capital.

Germany is the ECB's biggest contributor, followed by France and Italy.

According to ECB figures, total subscriptions for non-eurozone central banks such as those in Britain and Denmark would increase in a single step from 1.740 billion euros on December 28 to 3.250 billion a day later.

But Thorsten Polleit at Barclays Capital told AFP: "This policy does not really address the problem's core. What is needed is a really credible policy by national governments to get public finances back on a solid basis."

The ECB rarely misses a chance to hammer home that message as well.

© 2010 AFP

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