No, the Bundesbank has not reached its limit

by Karl Whelan

Vox
December 12, 2011

A recent Vox column argues that the Bundesbank is selling off assets to lend to peripheral central banks, that this process is about to end, and the result will be a catastrophe. This column argues that such claims are based on a misrepresentation of the Bundesbank’s accounts and a misunderstanding of ECB monetary policy. The Eurozone may be in crisis but for entirely different reasons.

In a recent VoxEU column, Tornell and Westermann (TW) note that banks in the GIIPS (Greece, Italy, Ireland, Portugal, Spain) countries have borrowed heavily from their central banks (see Tornell and Westermann 2011). They state that “To fund these loans, GIIPS central banks borrowed mainly – via the ECB – from other central banks, in particular the Bundesbank. In order to fund these loans, the Bundesbank sold its holdings of German assets”, that “the Bundesbank will soon exhaust the stock of securities that it can sell to fund further loans to the Eurosystem”, and that this may trigger a significant crisis.

The Eurozone may be in crisis, but, the very real crisis facing the Eurozone is not at all related to the “Bundesbank running out of assets” scenario described by TW. The Bundesbank is not lending money to GIIPS central banks. It is not selling off assets to fund such loans. And there is no looming crisis relating to the depletion of Bundesbank assets.

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