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Eurozone central bank losses risk bailouts and more political pressure

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When a company tells its shareholders that it expects to incur €9 billion in losses over the next five years that would wipe out all of its provisions and equity, it usually leads to an existential crisis. The normal rules don’t seem to apply to the Belgian central bank.

The BNB’s warning – which included the cancellation of key dividend payments this year – caused its shares to drop nearly 18 per cent last week. But it still managed to reassure investors that its financial problems “will not question its stability”.

said the 172-year-old institution, which is one of 19 national central banks to subscribe to the euro and is the major shareholder in the euro. European Central Bank.

with central banks Around the world they are sharply raising interest rates to tackle spiraling inflation and liquidate their massive bond purchases, economists expect many of them to incur big losses as they now have to pay more interest to commercial banks than they earn from other regions.

Central banks across the eurozone will have to pay around €70 billion in interest on commercial bank deposits next year, estimates Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management. That amount is much larger than in recent years as a result of the European Central Bank’s aggressive monetary easing from 2014-21, when negative rates meant lenders paid to deposit money into the central bank.

Ducrozet warned that the scale of payments on deposits would drag many eurozone central banks into the red, adding that some “may face increasing political pressure to recapitalize.”

Some believe that this will only lead to “a storm in a teacup,” said Danske Bank strategist Piet Heines Christiansen, pointing out that central banks do not aim for profit and cannot go bankrupt when they have the ability to print money and earn revenue. On the production of the coin through a process called Seigniorage.

Graph showing the European Central Bank's balance sheet and forecasts.  The graph includes asset purchases, lending to banks, and other items and excess liquidity, 2007-25.

“It doesn’t matter economically because a central bank can do well with less capital, even negative capital,” said Erik Nielsen, chief economic advisor for Italy’s UniCredit Bank.

Several central banks have already fallen into negative stocks in the past without it causing major problems, including those in the Czech Republic, Sweden, Chile, Israel and Mexico.

However, others warn that increased losses may have many unwanted side effects. Most of the monetary authorities are nationalized. And part of its profits – including those of Belgium, which is 50 percent state-owned – was paid to the ministries of finance.

Thus, lower central bank profits will hurt public finances. If the losses are too great, they may need government bailouts that risk increasing political pressure and threatening their independence.

“It is difficult to say whether this will ultimately mean a loss of independence,” said Sandra Philippon, chief economist at Dutch bank ABN Amro. Of course, recapitalization from the states does not help [central banks] to be more independent. “

Over the past decade, central banks in the eurozone have made healthy profits, totaling around €300 billion between 2012 and 2021, thanks mainly to income on the bonds they bought during this period and negative interest earned on commercial bank deposits.

While a portion of those profits went to national governments, they also used a large portion to build up reserves that could absorb losses while loosening their ultra-loose monetary policies.

These reserves come into play since central banks start to raise interest rates sharply. The European Central Bank, for example, said that together with 19 national central banks in the eurozone, it had built up €116 billion of provisions and €116 billion of reserves and capital, adding that “our net equity is large enough to withstand potential shortfalls.”

Some central banks also suffer losses in the large bond portfolios acquired in recent years. The Reserve Bank of Australia recently announced an accounting loss of A$37 billion ($25 billion) in its pandemic bond purchase programme, leaving it with a negative equity position of A$12 billion.

The UK’s Office for Budget Responsibility estimated that the Bank of England would need to pay £133 billion from the government over the next five years to cover losses on its quantitative easing portfolio.

Some central banks also invested their own money in securities, exposing them to losses after their value declined. An extreme example is the Swiss National Bank, which warned Last October, it had already posted a record loss of 142.4 billion Swiss francs ($152 billion) in the first nine months of this year, mostly from losses on its investments from its foreign exchange reserves.

Major central banks, such as the European Central Bank and the US Federal Reserve, can deal with any negative equity by piling up “deferred assets” until they return to profitability, allowing them to avoid a government bailout.

However, such a scenario would be inconvenient, especially when the European Central Bank was likewise publicly criticize Other European central banks, such as the Czech National Bank, have negative equity. It will also come at a time of mounting Political criticism of politicians about the monetary policy response to rising inflation.

“Especially in a situation where central banks are trying hard to restore their credibility as inflation fighters, negative equity would be counterproductive,” said Carsten Brzeski, head of macro research at Dutch bank ING.


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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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