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Trying To Save Eurozone, Bundesbank Falls $300 Billion In Debt

By: EW News Desk Team Date: 2 February 2012

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02 February 2012

The Deutsche Bundesbank, Germany’s central bank, is now 228 billion euros ($300.5 billion) in debt, reported The Telegraph on Wednesday, after using up its entire stock of private assets to prop up the eurozone’s financial system.

According to The Telegraph, the Bundesbank had up to 270 billion euros of private securities (refinance credit) prior to the financial crisis, but had sold off all of its assets in order to meet the European Central Bank's (ECB) TARGET2 scheme, which required the Bundesbank to provide 496 billion euros to other eurozone countries in trouble, chiefly Greece, Ireland, Italy and Spain.

Consequently, the Bundesbank had to borrow money from German banks in order to meet its obligations, though it still maintains a stash of gold, which the bank has thus far refused to sell.

"This is reaching the danger point. It (the debt) is already one and a half times the total budget of the German government," said Professor Frank Westermann of Osnabrück University. "If any of the crisis countries exits the euro or if there is an EMU (Economic and Monetary Union of the European Union) break-up, the Bundesbank bears extreme risks."

These risks could be extended even further following news that the ECB could be preparing a second money auction for eurozone banks that would require further monetary input from national central banks across Europe.

On Wednesday, Bundesbank president Jens Weidmann warned that the ECB’s loans should not go too far as they were threatening to undermine the financial stability of the lenders.

"We must not heed the siren songs calling for Germany to temporarily abandon its (fiscal) consolidation course, ultimately to support weaker members of monetary union," said Weidmann in a speech cited by AFP.

“Too generous” liquidity provision, Weidmann added, could open up business opportunities for banks “that could mean higher risks for banks and thus also risks to price stability.”

While the Bundesbank has thus far gone along with the ECB’s measures, in regards to financial lending, the German central bank is now said to be worried about the relatively generous terms imposed by the ECB on its liquidity provision and the risks involved.

"The longer it goes on, the larger the cost of a eurozone break-up since these credits could be wiped out with horrendous losses,” said David Marsh, author of books on both the Bundesbank and the euro, in an interview with The Telegraph.

“It is about time this was the focus of proper debate in the Bundestag, since the German taxpayers may have to pay for it," he added.