ECB eyes seeking capital hike

Wednesday, 15 December 2010 00:01 - - {{hitsCtrl.values.hits}}

FRANKFURT (Reuters) - The European Central Bank is considering requesting an increase in its capital from euro zone member states, euro zone central bank sources told Reuters, as a cushion against any potential losses from its bond buying.

One source said among the options being discussed was a doubling of the ECB’s capital. The other source said it was not yet clear how much the bank would ask for.

One of the sources told Reuters the bank was planning to ask for its capital to be raised. A second source confirmed the plan was being discussed, adding: “The issue is that the ECB is worried about potential losses from its bond buying.” “At the moment we are buying very modest amounts, but what if that is increased, and what if the bonds you buy are suddenly worth 30 percent less?” The ECB declined to comment.

The bank’s subscribed capital is almost 5.8 billion euros compared with a balance sheet of almost 138 billion euros, according to its latest annual report.

All of the European Union’s 27 national central banks contribute to the ECB’s capital. The 16 countries already using the euro make up 70 percent of the money with other EU members -- including Britain and Denmark who have euro opt-out clauses -- making up the rest. National central banks can increase their capital in a number of ways, including government injections, selling off assets, using reserves or by maintaining profits.

Since May the ECB has bought 72 billion euros of government bonds as part of a 750 billion euro EU/IMF rescue package hastily brought in at the height of the euro zone’s debt crisis.

Most analysts believe it is concentrating its purchases exclusively on euro zone debt trouble spots Ireland, Greece and Portugal.

CASH STRAPPED

A decision to bolster the ECB’s capital now would come at a time when central banks and governments are struggling with the cost of the financial crisis and recent turmoil on the currency bloc’s financial and debt markets. Greece and Ireland have been bailed out to the tune of almost 200 billion euros while many parts of Europe are straining under intense austerity programmes.