The European Central Bank in deficit for the first time in twenty years

Last year, the ECB recorded a loss of 1.3 billion euros. The institution has not experienced this since 2004.

What is weighing down the balance sheet of the European Central Bank are high interest rates. Some will say that it is the sprinkler watered: the rise in interest rates, ultimately, it was the ECB itself which decided to curb inflation. There have been ten rate hikes in the last eighteen months. The ECB’s objective was to slow down economic activity to limit the surge in prices.

With the recovery that followed the Covid confinements, Russia’s outbreak of war in Ukraine, the surge in energy and food prices… the institution based in Frankfurt, Germany, had no no other choice than to raise rates to put out the fire.

This rise in interest rates weighs on the results of the ECB via the refinancing operations of commercial banks. Explanation: to be able to grant credit to their clients – businesses and individuals – commercial and private banks like Société Générale or BNP Paribas deposit money with the ECB. In exchange for this investment, the ECB pays them interest. And as rates rose significantly, the institution automatically had to pay back a lot of money to private banks.

The ECB cannot go bankrupt

These interest expenses represented around 14 billion euros last year, compared to 2 billion in 2022. Furthermore, to support the European economy during Covid, the ECB had already bought back from member countries of the euro zone part of their debt via government bonds. By doing so, she helped them but it took a toll on her bottom line.

However, the ECB is not in danger: unlike private banks, a public central bank can operate with exhausted provisions because it has the privilege of printing money and creating the necessary money. So she cannot go bankrupt. And then, as we speak, the ECB, guardian of the single currency, has 46 billion euros of available capital in its coffers.

In summary: the ECB helps European states that need it, and can continue to do so without difficulty, but still calling on the major capitals to exercise budgetary prudence.