Has the ECB Put Itself in a Tricky Situation with This Release?

The euro zone’s system of central banks earned as much as 14 billion euros ($18.5 billion) last year from holding sovereign bonds of crisis-hit countries; the European Central Bank alone earned 1.1 billion euros ($1.45 billion) in interest from its 208-billion-euro portfolio of sovereign debt issued by Italy, Greece, Spain, Iceland, and Portugal.

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These numbers are not impressive when compared to the earnings of the world’s largest companies (Apple generated $156.5 billion in revenue in fiscal 2012 while Exxon Mobil pulled in $482 billion), but its not insignificant when compared to the economies and budgets of the countries whose debt it profited from. For comparison, Greece’s estimated gross domestic product for 2012 was $280.8 billion.

The sovereign bonds were purchased under the Securities Markets Programme — which, though now-defunct, was created in 2010 to calm fears that the euro zone would break up under pressure from the debt crisis. The program ended last year, but the European Union has set up another such bond-buying program to buy more government debt. After all, ECB president Mario Draghi has said he will do “whatever it takes” to prevent a break-up of the euro zone.

One billion euros may seem like a relatively small sum compared to the massive fiscal consolidation taking place across Europe, but for smaller countries in the European Union, this profit is fairly remarkable. Ireland — until it renegotiated its debt — faced annual interest payments of 3.1 billion euros. Except for Greece, where profits from the Securities Markets Programme will be sent back to Athens, the earnings from these bonds will be retained as profit, just as any central bank would treat interest gains. Because the SMP bonds were purchased at depressed prices, the interest they yield is very high…

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