Eurozone central banks they are expected to suffer their first major losses as a result of a decade in which they continuously printed money and bought securities to support their economy. They are expected to suffer losses both this year and next, as higher interest rates mean more money they have to pay in interest on deposits. This means that they may need capital injections from their governments, ie taxpayer money.

Some officials even seem worried about the impact on the country’s budgets, but the Bank for International Settlements stressed a few days ago that central banks can operate at a loss and not risk bankruptcy. As Mario Centeno, governor of the Bank of Portugal, noted in an interview, “many central banks will report negative results for 2022 due to the difference between the interest rates on our assets and the rates on our liabilities.” Mr. Centeno also explained that central banks are borrowing at higher interest rates that are not covered by returns on bonds and any other debt securities on central bank balance sheets.”

The biggest losses will come from the Bundesbank, with the exception of the Bank of Greece, which is expected to show profitability.

I look forward to the announcement of the results on Thursday. Bank of Greece it was expected to show profitability as it made much smaller purchases and bond yields were higher. The German Bundesbank will suffer the biggest losses. And if last year it is assumed that the losses of the German central bank will be relatively small, then this year they are expected at the level of 26 billion euros. This is an assessment by Daniel Gros, a member of the Center for European Policy Studies in Brussels, in case euro interest rates remain at current levels. This means that the powerful federal bank will write off projections of 20 billion euros in losses from bond buying programs, as well as 5 billion euros from its capital and cash reserves. If it were a business, writing off such an amount would be tantamount to bankruptcy. There will be some sort of warning when the annual results are announced, Groch said, and the Bundesbank is “trying to quietly negotiate a capital injection from Berlin.”

As for other central banks in the euro area, they are also expected to lose big, but not so big as to write off capital. According to Daniel Gros, the Bank of France will announce losses of 17 billion euros, the Bank of Italy – 9 billion euros and the Netherlands – 5 billion euros. If, however, interest rates remain high next year, both the Bank of France and the Bank of the Netherlands are expected to show negative equity. Bank of the Netherlands governor Claes Nott seemed to anticipate public opinion in September when he warned of “possibly significant cumulative losses” in the coming years, which “in the extreme case could require a capital injection by taxpayers.”

Investors are returning

ECB interest rate hikes are making a tectonic change in capital flows as they reverse investor flight from European bonds and the euro. According to Deutsche Bank, a record outflow of 818 billion euros was recorded for EU bonds. were reversed by the end of 2021 thanks to a 300 bps increase in euro interest rates since last July. The decisive factors were increased harvests, as well as the fact that the war in Ukraine did not lead to an extreme escalation of the energy crisis. Thus, investment funds are leaving high-yielding markets, such as the American one, and returning to euro securities. Market expectations are now converging that the rate will be increased by another 125 basis points and low energy prices are expected to widen the EU’s current account surplus. Some analysts, including Societe Generale’s Keith Euchers, even see a return of the euro to pre-QE levels of around $1.40 as possible.