The Balance Sheet of the Euro-System from 1999-2015

Unlike any other non-MFI balance sheet in the ‘real economy’, the ECB, like most other central banks (like the Fed, the Bank of England, the Bank of China, the Bank of Canada, the Swiss National Bank, and many more), can expand it by simply creating more money, both virtual and real legal tender (ECB 2015b; ECB 2004; ECB 2013b). Legally and officially, it is only indirectly bound by its objective to maintain purchasing power or price stability (see 2.1.3). The ECB compiles, consolidates and publishes updates of its ESCB consolidated bal-ance sheet on a weekly-yearly basis, with all respective ECB accounting items (ECB 2013b).

Figure 29 Balance Sheet Assets and Liabilities of the Euro-System

Figure 39 depicts a time series co-presentation visualization to make these bigger amounts of data and trends more graspable, analyzable, and interpretable. Whenever the ECB ‘pu r-chases’ something with its legal tender the object becomes one of its assets and an

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lent amount of money is supplied to counterparties of the economy. However, in reality this is mainly MFI money (irrespective of being borrowed or earned) and doesn’t directly enter the real economy, only subsequently as debt [which is one of the key problems of the overall monetary transmission procedures (covered in chapter 4.3)]. For instance, if the ECB purchases gold its reserve assets rise in conjunction with its liabilities that were taken (ECB 2013b). Weekly liabilities and assets make up the dynamic ECB’s balance sheet (Figure 29).

The three main drivers of the Eurosystem’s balance sheet are: (1) financial market devel-opments and portfolio management decisions, or changes in the value of the foreign re-serve and own funds portfolios (ECB 2010). (2) Liquidity demand, banknotes in circulation, making a €100-600m seigniorage income in the profit and loss account p.a. (ECB 2010). (3) Liquidity-providing operations and lines in foreign currency since the FC in 2007 (ECB 2010).

Basically, there are different types of liabilities roughly categorized in ‘to whom’, and types of assets, claims, securities, debt and CDs (certificates of deposit) that show ‘with whom’. The example of the ECB’s assets of gold deposits continuously increase and have only fallen during the EC due to a mild gold price shock. Although, it is officially not a task of a central bank to hoard gold reserves in fiat money systems, it is still very typical for most central banks, e.g. the Fed, etc., only Norway has sold its gold reserves in 2004 (WGC 2015) except seven bars for exhibition purposes. Reserves give value to savings and ‘credibility’ and must be ‘sufficiently liquid’ to supply ‘three month of international trade obligations’ (IMF 2008).

At a glance, the ECB’s total assets skyrocketed in 2008 and 2012/13 as a reaction to the FC and EC. Liabilities and many other types of liabilities to euro area MFIs boosted backed only by respective assets from lending to euro area MFIs and securities of these MFIs. Monetary relaxing took also place in the US Fed’s balance sheet accounts, which is even more pro-nounced and also shows strong augmentations in mortgage backed securities (MBS) and US treasury securities in the FC. Assets and liabilities are analyzed to provide the big picture:

ECB’s Assets Side: During the crises a very strong accretion of ‘lending to euro area MFI (in Euro)’ has occurred by means taken to maintain and support ‘struggling CBs’. How well did the ECB, CBs and MFIs manage the crisis with the new liquidity injection? Although the cri-sis could be ended, a huge inefficiency gap arose and has not been closed until today: The balance sheet items reveal four consecutive flurry liquidity injections to MFIs, three after the FC and one big one after the EC, in the shape of three plus one tips in Figure 29. The

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pattern resembles M0 because the ECB is only lending legal tender and because of the ex-treme disproportional magnitude of injections (reaching up to two-fold of the natural M₀ mean). This hectic post-crises lending in addition to the backing of euro area MFIs using tax payer’s money to bail-out too-big-to-fail MFIs, the ECB asset side correspond with spike in liabilities to euro area MFIs. Interbank lending was troubled, but most of the amplitude and area of the liquidity spikes can in fact be found to have ended up again in the deposit facili-ty and/or reserves (see 4.2.2) at the same time. This reveals a high level of inefficiency and strategic games played behind the scene, or alternatively miscalculation of the CBs and ECB. It could be picturesquely viewed as the tip of an iceberg awaiting the titanic of mone-tary transmission to the euro area. Basically, the money simply did not pass into the real economy where it was needed, but it was only ‘lazily sitting at the ECB’ - and still does so today. This way it creates costs for the EMU until today, and earns a negative interest while doing so, while the real economy is not supplied (functional inefficiency) (ECB 2015b). It takes away leverage and liquidity constraints of major MFIs that allows money deprivation.

A significant quantity of securities - public and private bonds - have also been purchased after the FC in turn of the Securities Markets Programme (SMP), which was conducted as generally sterilized outright monetary transactions (OMTs) (ECB 2015b) totaling €218bn. This led to a broadening in the asset side since 2008 (pale blue, Figure 29). A closer look reveals that they consist of ‘troubled’ sovereign bonds from Italy, Greece, Spain, Portugal, and Ireland (ECB 2013c) of that time, as the EC had much increased the risk of sovereign defaults and the ECB had to ‘step-in’ and thus lost a bit in financial strength and credibility.

Furthermore, the recent PSPP (Public Sector Purchase Program) with an announced €60bn per month since 2015 ending in 2016 shows its first signs. A forecast - based on ECB press releases - would yield total assets and liabilities of €3.55tn by the end of 2016 (ECB 2015a, Press Releases 4Q-2014, 1Q-2015). They could bear an unpredictable medium-term risk of inflation and disadvantages all EMU small savers. These non-sterilized QE actions already bear effect on major economic indicators in 1Q-2015: depreciation of the Euro, increasing European stock indexes, declining Euro benchmark bond yields, on so on with this pattern of stylized facts (OECD 2015). The aforementioned inefficiency in monetary transmission is corroborated by negative changes in the PMI^TM (Purchasing Managers Index) index, which dropped when the ECB announced its plans and then showed a recovery after 4-6 month.

The expected economic stimulus has remained obsolete clearly demonstrating MTC

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ciency, at least in the short-term. Remarkable, with several hundred billion Euros since 2015 no direct economic benefit can be measured so far of these MP actions. This again highlights the tremendous importance of monetary transmission research, like in this study.

ECB’s Liabilities Side: The liabilities side of the ECB’s statement of financial position, of course, matches at any given time, at a weekly ‘snapshot’ or ‘stock’ resolution, its respec-tive asset side (it represents more than 800 balance sheets of the entire Euro System in sequential steady-chronological order)(based on ECB items, ECB 2015b). The liabilities lay open with whom ‘how’, and in which form obligations were taken. A major accrual was seen for euro area MFIs - though much of them stayed unused, as noted. Banknotes in cir-culation represent a ‘quasi liability’ of the central bank that has steadily increased over the years, from €400 to €1000bn. The FC and EC had almost no effect on its growth, again ind i-cating MFI inefficiency, post-deprivation and risk aversion effects of MFIs as only little esca-lation of non-MFI liquidity preference occurred, only a fear-driven decline in consumption.

A shift also occurred in the revaluation accounts that bear the recent ‘value corrections of ECB’s equity’ as required by the ECB/ESCB accounting rules (ECB 2010): this essentially dates from changes in the value of e.g. US$ holding reserves (but not the SWAP lines which are at a fixed repo Fx rate at the time of transaction) and gold (ECB 2010). The liquidity measures in foreign currency after the FC had a smaller impact on the total of liabilities.

In summary, after the FC, the ECB has provided domestic and foreign ‘liquidity lines’ to sta-bilize the euro area’s and global banking funds markets that had at times broken down. This led to excess reserves and a more uncontrollable money creation potential of MFIs. To pro-vide foreign liquidity the ECB has taken some temporary reciprocal currency arrangements (SWAP lines; with the Fed’s FOMC, BoE, BoC, among others) since 2008 when the global bank funding exchange market had at times broken down or became periodically weak.

These means were initially temporary and were planned to be terminated in 2010. Today they still exist because they were inwardly converted into ‘standing swap arrangements’ (ECB 2015c; ECB 2013a) with major central banks (Fed, BoE, BoJ, SNB, etc.). Eventually they were extended as needed, indefinitely (e.g. ECB Fed SWAP lines)(Fed 2015). Interestingly, already since December 2007 (FRBSL 2015b), before ‘the official FC’, they have increased the position ‘claims on non-euro residents in foreign currency’ and helped safeguarding these markets (ECB 2015a, Press release 25.7.2009) from MFI inefficiency heralding the FC.

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ECB operations: The balance sheet basically reveals all of the quantitative means taken by the ECB from 1999-2015. It can be used to track repurchase agreements and QE programs (other liabilities to euro area MFIs, and Non-Euro liabilities of euro residents) but all key details about the deals are not provided (with who, how, TA specifications, price, quantity).

This might seem a trivia, but in only one of the latest QE APP program €1tn are intended to change hands and the public is not told any details where the money will end up. Moreo-ver, all TAs between the ECB and the EMUs resident commercial banks (CBs) are 100% con-fidential and can also not be checked by the public or journalism, even not by most politi-cians. Furthermore, only ‘big’ MFIs are eligible for such operations and may create up to a 100-fold of book money on its top. This allows for an extreme leverage allowing MFIs ‘ theo-retically’ to buy extreme amounts of precious assets plus new recycled liquidity of the MFI meshwork. Admittedly, this is not in accordance with a ‘free market economy’ or ‘demo c-racy’, as most of these ECB operations only benefits MFIs at the cost and sellout of the real economy. The ECB, cynically, still has no real alternative to recent QEs to fulfill its mandate.